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The Financial Director interview – The Five Hundred Billion Dollar Man

For a company that’s still only just approaching the back door of the FTSE-100, ICAP is a pretty remarkable business. The numbers attached to this, the largest inter-dealer broker in the world, make it necessary to double- or even triple-check all the key facts – they just seem too enormous. We wonder if we have the right number of zeroes, the right time period – the right currency, for that matter.

Jim Pettigrew, FD of ICAP since 1999, agrees that the numbers are “mind-blowing”, and that he is always having to reassure novices to the business that, yes, they did hear him correctly: ICAP’s eurobond, Treasuries, swaps, options and money-market dealers handle about $500bn of transactions per day. There are some $9 trillion-worth of international bonds and notes outstanding – and $80 trillion outstanding in interest rate swaps.

In the year to 31 March, ICAP showed 26% turnover growth to £664m, on which it made net income of £77m, up 47%. That net income equates to about 0.0001% of all the money that passes through its dealers’ hands – roughly one pound in every million. “It’s a classic high-volume, low-margin business,” Pettigrew says, with impressive understatement. It’s hard to say whether it’s his Scottishness – he’s an Aberdonian – or his training as a lawyer that makes him eschew extravagant hyperbole in an industry that thrives on extravagance.

To get an understanding of ICAP’s business, it’s important to understand that very little of its trading activities are as principal – it’s almost entirely agency-based, with ICAP taking a sliver of commission on each trade. (This has the distinct advantage of reducing to almost zero the likelihood of a rogue trader taking a crippling punt on the market.)

So how do you manage a business like this? “You just have to have resilient systems that are scalable …” (yeah, right – scalable to half a trillion dollars a day) “… and all the risk things need to be in place so you can pump that volume through. You get your cut of that and then you’ve got to manage your cost-base in that environment. I think it is as simple as that in terms of the volume,” he says.

At the operating profit level, ICAP’s margins are in the high teens. There are two main business activities. The securities broking business deals in things such as US Treasuries, euro government bonds, corporate bonds and Japanese government bonds, plus a small equities business. Historically, much of this business came out of Garban, which was demerged from United News & Media in 1998 (and which was the business that Pettigrew joined in January 1999). Being a highly commoditised, vanilla-flavoured agency activity, it typically has lower margins than the derivatives and money broking arm, which deals in swaps, options, credit derivatives – and even inflation derivatives. This latter business formed the core of ICAP, which was founded in the mid-1980s by chief executive Michael Spencer and merged with Garban in 1999.

There is also a loss-making electronic broking arm, the cornerstone of which is now the recent US acquisition BrokerTec – a deal that took about a year to finalise and to get US Department of Justice approval. Making sure that the right people are in place to integrate this business and make the best use of the two companies’ technologies is probably Pettigrew’s highest priority at present.

While Pettigrew has the job of keeping a close eye on profit margins, it’s not easy in a business where more than half the revenue is swallowed up by salaries and bonuses. Moreover, the City is notorious for being a place where, in good times, brokers want big bonuses – and in bad times, brokers want big bonuses (the average salary at ICAP is £161,000). Pettigrew is hardly complacent on this point, but he thinks the balance of power is slowly changing away from the individual brokers and toward the employing firms, which will allow him to reduce the payout to his brokers.

Client business goes where the capital and liquidity pool is – that’s where the ability to execute a trade lies – and is less likely to follow an individual who decides to up sticks and go to another firm. As ICAP is the biggest overall player in its market – market share is now about 25% – it has got the market clout to execute almost any trade for its clients. As one rival, Mickey Gooch of GFI, put it recently, “Brokers are increasingly becoming exchanges in their own right.”

Staying at the forefront of technology helps attract clients and brokers, too. If it’s handled well, then ICAP’s brokers will be able to handle more and bigger transactions, so they will still be able to enjoy rising incomes, even if it turns out to be a smaller slice of the enlarged cake.

Pettigrew admits that, “People are still a risk – if a huge team walked out to a competitor, for example.” He should know, as ICAP recently succeeded in a court case brought by competitor Cantor Fitzgerald against three ex-employees who, Cantor argued, had breached their contracts when they were poached by ICAP.

Talk of ICAP’s archrival brings to mind the cruel irony of the terrorist events of September 11. While ICAP’s offices in the World Trade Center were destroyed, the firm suffered the loss of just one life. Cantor Fitzgerald was almost totally wiped out as many hundreds of lives were lost that day. “They were on the top floor so lost a huge percentage of their employees,” Pettigrew says. “That is not something you want to happen to anyone. The industry as a whole worked well after the event. People were very kind to us. There was a community effort to get things sorted.”

As a result of that effort, temporary office space was found quickly and huge efforts went in to figuring out who owed what to whom. “We had put in Oracle financial systems and I am glad we had done it now. The ledgers were unaffected,” he says, “but the balances were the problem. Even the clearing house was having problems.”

ICAP has now moved into newly developed offices on the west side of the Hudson River. Yes, that means New Jersey, not Manhattan. But Pettigrew won’t entertain any notion that an opportunity grew out of the tragedy.

“You start from scratch. You have a new office and hardware,” he says. “But I don’t like talking about opportunities coming out of a disaster. I suppose you can reflect better on your disaster recovery processes,” he concedes. And the insurance claim still rattles on, of course. We suddenly seem a long way away from Aberdeen University, where Pettigrew studied law in the 1970s. “Although I was perfectly reasonable at law, it just didn’t do it for me,” he says. A post-graduate diploma in accountancy from Glasgow University positioned him nicely to join the firm then known as Arthur Young McLelland Moores, now part of Ernst & Young. Auditing proved little more attractive than law, but a period of time spent in the firm’s business services unit – which handled pretty much everything from startups to liquidations – convinced him he belonged in the commercial world. A succession of jobs in industry followed until, in the late 1980s, Pettigrew became FD of a business unit at the insurance broking group Sedgwick.

When Sedgwick acquired Noble Lowndes, he was offered a completely new position as group treasurer. It involved using a different set of disciplines.

“You’re looking forward rather than counting numbers back. You’re assessing the risks of the business, understand much more about relationships with outside parties, banks and management of foreign exchange exposure. It really was interesting. That job challenged me more than most.”

When Sedgwick was swallowed up by Marsh & McLennan in 1998, putting paid to Pettigrew’s hopes of becoming group FD, he was persuaded to take the job at Garban by chairman Charles Gregson. The business was demerging from United News & Media, so would give him his first group FD role at a listed company. But Gregson also convinced Pettigrew that Garban was a not dissimilar business to Sedgwick. “In essence, an insurance broker is putting the buyers of insurance together with the sellers. It’s no different here; it’s just a different commodity,” he says.

It was also apparent that, like the insurance business, there was a period of consolidation on the way. “So I took a risk,” Pettigrew recalls. “I had several other jobs, but I said to myself, ‘Who knows what’s going to happen?’ You know as well as I do, (in a merger) you sometimes win and sometimes don’t. It’s not down to the ability of the CFO. Very often in these things it’s, ‘Who gets to be the chairman? Who gets to be the chief exec? How does the balance of the board look?'”

At about the same time as Pettigrew was considering joining Garban, money broker Exco was acquiring Intercapital, a private business founded by Michael Spencer, and Spencer became chief exec. While Pettigrew thought he might get a few years’ experience at Garban before any serious consolidation took place, in truth it was a matter of weeks. By autumn 1999, Intercapital and Garban had merged to create ICAP and Pettigrew got the FD role in the combined group.

In terms of business area and geographic reach, there was a good fit between the two businesses, but there was also a difference in culture.

Garban was “quite control-orientated”, says Pettigrew. “Arguably, too control-orientated, too inward-thinking, but they had a good balance sheet and good control disciplines.” ICAP, on the other hand, was more entrepreneurial. Pettigrew describes Spencer as “a charismatic, very strategy-orientated visionary”. He is also ruthless – that much goes with the territory in this industry – and acquisitive. Spencer himself says that there is probably only room in this business for two or three players, “and the big question is, who will be the other two?” reported Financial News recently.

So, to put it mildly, Spencer sounds like someone who needs a good Scottish lawyer-accountant to rein him in and maintain some discipline. “The key to that merger was putting the two (cultures) together and making sure you didn’t snuff out Michael’s entrepreneurial spirit,” says Pettigrew.

“And I think we can safely say we ain’t done that!” How do you achieve that? “You can’t write it down,” he says. “It’s personalities, it’s not about balance sheet skills, it’s not about the tradition of the finance director. It’s all about being aware of your environment – the relationship side of things.”

Budgeting, for example, is a process that has to be handled in a way that gets the balance just right. “Michael doesn’t think budgeting is the be-all and end-all of the business; it’s just one important facet of it,” Pettigrew says of Spencer. “He understands that and he understands the importance of it now because we’ve tailored it in the right way. We can’t let costs get out of control because the City is just waiting for that to happen. You look at my analysts presentations: I’m always giving them a slide on what’s happening in underlying costs. But underlying costs don’t need to be zero in an expanding business. We’ve got to be responding (to market developments) all the time. So that’s how you handle Michael: you’ve got to be highly credible with him, know the areas you’ve got to stand your ground, and have flexibility on other points.”

Looking to the future, Spencer – who owns almost a quarter of the equity, some 26 million shares in what has been one of the best performing FTSE-350 companies over the last three years – would dearly love to see ICAP go into the FTSE-100. Pettigrew is less focused on that as an ambition, seeing it more as a natural consequence of running the business properly. “Using a golfing analogy, you don’t sit on the 17th and plan your shots for the 18th. Do things right at each hole and you will make your score.”

CURRICULUM VITAE
Name: Jim Pettigrew
Age: 43
Qualifications: LLB, DipAcc, CA (1983), MCT (1994)

CAREER
1999-: Group FD, ICAP
1988-1998: Sedgwick Group: financial services FD, group treasurer, group FC, group taxation controller, deputy FD
1986-1988: Group chief accountant, J Fleming
1984-1986: Company secretary, Bell & Sime
1980-1984: Ernst & Young

Biggest challenge in your job?: Getting the pitch right. I constantly ask myself if I have added value at the end of each week. Biggest hassle?: The year-end and all the accounting standards. You spend an extraordinary amount of time on reporting when you can’t often afford that time. Which company would you like to be FD of?: I am an Aberdeen supporter, but I wouldn’t want to be their FD. That would be one challenge too many.

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