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11 March 2015

Metallgesellschaft Ltd - Epitaph? Or Blueprint?




Nineteenth century Germany produced many industrial powerhouses, in mining, chemicals, manufacturing - in fact, in all sorts of different areas of heavy industry. The events of twentieth century history meant that the majority of them had to reform, re-adjust and refinance not once, but twice; in the nineteen twenties and again in the late nineteen forties. Some were broken up, some were swallowed by foreign investors, but many struggled through that difficult half century to maintain their place at the industrialists’ top table.

Metallgesellschaft

One of those was Metallgesellschaft AG, which emerged out of a Frankfurt-based metal trading operation to become a giant in metals and mining, chemicals, recycling, plant construction and a myriad other interests. The growing complexity of its base metal hedging requirements led it to found - in 1971 - the London-based Metallgesellschaft Ltd, a Ring-Dealing member of the LME. Through the seventies and early eighties, that company grew to become an influential player on the LME. It didn’t have the cachet of being one of the original founder members, but it did have an enormous conglomerate behind it, with a sprawling mix of trading, mining (through cross-shareholdings with a clutch of miners), smelting (part wholly-owned, part also via cross-shareholdings), and indeed processing. That gave it a powerful hand on which to base its LME trading. 

Growth and Influence

It had something else as well, to add to that financial clout - an entrepreneurial management and a core of settled, long-term employees. Plenty of others came, stayed for varying lengths of time, and left, having in many cases strengthened their careers by association. As early as the mid 1980s, that entrepreneurial management began absorbing competitors, often quite cheaply as their corporate owners tired of the volatile profit and loss generated from dreary 1980s LME trading. Henry Bath, Charles Davis and even - later - Rudolf Wolff, founder members all, were drawn into the MG grasp.

In the early nineties, the parent company in Frankfurt suffered a catastrophic loss in its oil trading business, substantially weakening it. It seemed as though the London tail was then able to wag the Frankfurt dog, as London’s earnings exploded upwards; customers were happy with the stability of seeing the same team and the same style, even if competitors tended to think the company was getting too big for its boots. That growth - in contrast to the parent’s problems - ultimately led to a brief flotation on the London stock market, followed soon afterwards by a takeover by Enron, the US energy trading group. 

Names, names...

That’s when the name MG Ltd disappeared; the team and the ethos remained the same, though, through the hubris of the Enron bankruptcy, to re-emerge as part of another US energy group, Sempra. By then the world was changing, and, as the commercial banks started flourishing their massive balance sheets in the base metals business, there was first the RBS Sempra joint venture, and then full ownership by the Royal Bank of Scotland. Finally, the business did begin to change, although it still remained an identifiable entity, with a large part of the team that built and nurtured it still in place. Like everybody else’s, profits rocketed in the boom years and the parent took a healthy cut. Ultimately, though, RBS also succumbed to the over-arching self-belief of its senior management (and EU pressure based on state aid provisions), and the still coherent business was sold to JP Morgan, which seemed to weather crises better than most of its competitors.

So What?

So why look at this today? Well, really because I think it has finally reached the end of the line. I don’t mean that in the sense of failure, of lack of profitability or loss of customers. I mean simply the end of the line as far as a separate, individual entity is concerned. Under MG AG, Enron, Sempra and RBS, there was always a whole, unified business maintained - which could be sold on from one ownership to another, as we have seen. Now, that doesn’t really seem to be the case. The physical trading has been sold off, as has the warehousing - both, incidentally, traditionally strong sources of income - because they don’t fit in a bank, for both regulatory and risk-management reasons. The brokerage does fit - certainly for now - and that is still there, but only a handful of the core group of staff remain, as part of an overall bank brokerage (not just metals) entity. The individual business  that was started in 1971 is effectively over; money is still being made, customers are still being served, but the strand of independence that  ran through all those previous ownerships is over.

It was a company that made a few people very rich and quite a lot of people quite rich; it dominated the business for a fair length of time, adapting as it went until adaptation was no longer possible and mutation into something else had to happen. It’s by no means a unique story, but it just happens to demonstrate a point about a changing world with a fair degree of clarity. 

Does it matter? Not in the least; it’s a simple story of how a business has changed over forty-five years and an interesting case study of how a culture survived for so long, under widely differing ownerships. The story is not really about Metallgesellschaft Ltd; that company is just an example. I could undoubtedly have chosen many others to illustrate the point. The reason I took MG is simply that it’s in a business with which I am familiar.

Culture, Teams and Cohesion

My point is about the integral culture of a team, until its final dispersal in the last couple of years. The thing is, the success was not driven by outside corporate influences, it came from the local management and their direction of their core group. That’s why the MG AG catastrophe didn’t really impact. It’s why, out of the wreckage of Enron, the metals group was pretty soon rescued. That wasn’t down to Enron sloganeering about respect, or integrity, or anything, it was about the core of the business having withstood that approach while maintaining its own integrity. Likewise during the RBS fiasco - there was still the finite metals operation there to sell, not because it was part of the overall bank’s culture, but basically because it wasn’t; because it was still a coherent entity with its own style. 

Is Big Necessarily Beautiful?

In an age where we have become accustomed to large entities absorbing smaller ones and attempting to draw them in to the overall culture, it’s an interesting reminder that in many ways it is more appropriate to let them continue in their own way; that way, you get to keep a more valuable asset. 

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