Old Mutual's return: breaking up is hard to do
The meeting and dining rooms on the executive floor of Old Mutual's home base in Pinelands are named after former employees - special employees. These days no one seems sure what the nature of that "specialness" is, the only obvious criterion being that the employee no longer inhabits the realm of the living.That criterion may not have been so critical in the 20th century when Old Mutual executives were "lifers", slipping quietly from decades of employment with Old Mutual into retirement and then ... But just 16 years into the 21st century the criterion seems prescient; the group has its fourth CEO, only one of whom began and ended his career at the group.Mike Levett started as a clerk at Old Mutual and worked his way up to the top position, driving the group's demutualisation and simultaneous London listing in 1999. What followed is almost certainly why Bruce Hemphill, the fourth CEO, faces a monumental deconstruction task.story_article_left1In 2001, Levett handed the CEO position to Jim Sutcliffe, who was the quintessential man from The Pru (Prudential) and as recently as 1999 had been Liberty's deputy chairman.Sutcliffe, who had a particularly torrid time at Old Mutual, the effects of a costly acquisition strategy bleeding into the 2008 global financial crisis, left the group in 2008.In a move likely to have had Old Mutual founder John Fairbairn (now the main dining room) spinning in his grave, Sutcliffe emerged as a nonexecutive director at Liberty a year later.Fortunately, the morbidity criterion for room-naming spared the Pinelands executives the horror of having named one of their rooms after a Liberty director."I'm not sure I'm necessarily the good guy here. I may not get a room," says the latest CEO appointee, who, understandably, feels that winning a postmortem popularity contest is the least of his worries.Hemphill reckons it will be a few years before it is possible to judge the success of the proposed separation of the group into four distinct businesses, although he has tagged 2018 as the "substantial completion" date."If it's possible we'll try to do it earlier, but we will take whatever time it takes."Hemphill, who says he has no post-2018 career plans, promises to update shareholders at year-end.So far the board has been coy about its plans. It needs the approval of key shareholders and bondholders as well as regulators in the UK and South Africa. Also, it does not want hedge funds feeding off speculation.story_article_right2For the South African businesses (Old Mutual Emerging Markets and Nedbank) the lifting of the London yoke should prove liberating."The South African Reserve Bank, National Treasury and the Financial Services Board have been amazing - incredibly supportive," he says.On the day of Old Mutual's announcement the three regulatory bodies issued a joint statement describing the "regular and constructive contact" during the strategic review and acknowledging the commitment of the board and management teams "to execute the managed separation in a way that safeguards the stability and integrity of the South African businesses and the financial services sector".The regulators believe the move, which will return full control of Old Mutual's South African and emerging market businesses, as well as Nedbank, to South Africa, "will have positive benefits for the economy". And there is nothing jingoistic about the regulators' comments - not even a hint they would have liked to point out the inappropriateness of one of the country's largest banks and largest insurance companies, equivalent to around 25% of the South African financial services industry, being run out of London by a UK board. It is difficult to imagine the UK or US authorities accommodating that sort of control structure.The "deconglomerate" decision was announced after a strategic review of the group concluded that there was no good reason for the four businesses to be tied together within a London-listed holding structure.For many, the decision was one almost 17 years in the making. At no stage during its adventure in London did the group come convincingly close to realising the promise that had accompanied its departure from South Africa and was subsequently repeated by successive management teams. Access to the global market for funds and acquisition opportunities went to waste as Old Mutual too often overpaid for what it bought and then struggled to bed down those purchases. Many believe Levett, who remained on as chairman until 2005, held too much authority throughout the early years.Hemphill will not be drawn on the success or otherwise of the early period, although he does point out that the market and shareholders were supportive at the time of the London listing. For his purposes the important part of Old Mutual's history begins after the financial crisis. Before 2008, says Hemphill, "you could get scale" and it was quite easy to build a global financial services group. But after the crisis regulators were unhappy about having a high concentration of risk in any one group, which helped make the decision to deconglomerate inevitable.Hemphill is adamant he was given no specific mandate other than to undertake a strategic review and thoroughly analyse all the options."We had to decide whether the status quo was sustainable or if it made more sense to break it up - or perhaps there was a clever alternative to these two extremes."story_article_left3Approaching the situation as an outsider may have helped Hemphill do the sort of zero-based budgeting required.For him there were no sacred cows. Which may have been why Hemphill was appointed instead of the favourite insider, Paul Hanratty, the group's chief operating officer, to replace Julian Roberts when he retired two years earlier than expected. It may also have helped that Hemphill undertook a similar, though smaller, transformative exercise, at Liberty, where he was CEO from 2006 to 2014.The general feeling is that Old Mutual is uninvestible in its current form. "Investors want exposure to UK Wealth Management, but with Old Mutual plc they're also forced to take the US and emerging markets," he says. "Or they may just want banks but they get insurance as well."So far shareholders are broadly supportive of the plan."No one's said it's a really bad idea," says Hemphill, adding that it is always a little scary to do things like this as they involve instability.Already there are signs that some South African shareholders are reluctant to exchange overseas equity exposure for cash. An inward listing of the UK-based wealth management business might be an option - one of the many that Hemphill and his team will have to consider in the months ahead.At stake is a lot more than naming rights to whatever small room might overlook Maitland's municipal cemetery from the firm's Pinelands base.