John Phizackerley, CEO of the world's biggest interdealer broker, TP Icap PLC, was fired after promising cost cuts he could not deliver, and the company was forced to issue a profit warning leading its share price to plunge.
Created through the £1.3 billion merger of Tullett Prebon and the voice brokerage arm of Icap in 2016, TP Icap said it now thought costs would rise sharply and savings would be less than previously stated. It cut the estimated savings from its merger from £100 million to £75 million on an annualized basis by the end of 2019.
Chairman Rupert Robson said costs were rising across the industry and claimed that the merged company would be more able to withstand this because of its size. He also tried to reassure the market that the logic and potential of the merger remained "extremely compelling and this will be evidenced in the coming years."
Phizackerley in 2017 said he was confident that there was a strong future for phone trading, which matches buyers and sellers of illiquid trades by phone, allowing dealers to discuss more complex trades for clients without alerting the market, in the face of increased competition from electronic trading. However, Icap's founder, Michael Spencer, elected not to join the merged company and remained in charge of its electronic trading and post-trade services business, rebranded as NEX Group PLC. This he agreed to sell to U.S. firm CME Group Inc. in May for £3.9 billion after selling his 9% stake in TP Icap for £200 million shortly after the deal closed in 2017.
Following a hastily convened conference call the evening of July 9, TP Icap's board under Chairman Robson voted unanimously to fire Phizackerley. The broker said he would be replaced by Nicolas Breteau, who heads TP Icap's largest business, global broking.
By the end of the day July 10, its shares were down 36%, at 269.3 pence per share, and £860 million had been wiped off its value. The shares were down a further 3.5% as of shortly before 4:30 p.m. July 11, at 259.9 pence apiece.
TP Icap admitted to higher-than-expected costs during its preliminary results in March, but at its annual meeting in May it said it remained "firmly on track to deliver our target of £100 million of synergies." This target was an increase from the original promise to investors when the merger was announced that savings would be £60 million annually.
TP Icap employs 3,000 brokers who negotiate trades between buyers and sellers in fixed-income, over-the-counter swaps and commodity markets. They are understood to have been unhappy at plans to reduce broker compensation from its current 50.5% of commission charged to clients. However, in yesterday's statement, the company said "market forces" meant it would now increase that rate to at least 51%. Average revenue per broker rose from £484,000 to £579,000 in 2017.
"At the full-year results, the message from the finance director and the investor relations people was quite cautious but Phiz was quite upbeat. He said you can always sack more people to get the cost base down. Brokers are highly paid, but they generate a lot of business and if you don't treat them right they are going to leave. There are more and more instances of a handful of brokers setting up shop somewhere in London on their own and trading successfully," said an analyst who declined to be named.
TP Icap's executive incentive scheme was scaled down in 2017 after investor disquiet, and executive directors saw their potential maximum of £85 million in shares available to them reduced to £60 million. Phizackerley's own remuneration was also scaled back and he earned £2.32 million in 2017, down from £3.38 million in 2016.
TP Icap said increased regulatory capital requirements and refinancing of its revolving credit facility would increase finance costs to around £35 million. It blamed Brexit, costs associated with MiFID II, and legal and IT security spending for an additional £10 million in costs that would hit underlying profits in 2018. It said costs associated with these issues would increase from the extra £10 million to £25 million in 2019.
"Nicolas spoke last November as head of global broking and laid out the vision to be 'the largest and most respected professional intermediary in wholesale financial markets'. We would not expect a dramatic change in this vision, but there may be changes to timescale and execution," wrote Marcus Barnard, analyst and Numis Securities, in a note to clients.
TP Icap said: "It has become clear that a change of leadership is required to exercise our medium-term growth strategy and deliver the detail of the integration process."
Phizackerley, a former Lehman Bros. executive who joined Tullett Prebon in 2014 and oversaw its merger with Icap, was reported in the London Evening Standard to be "very surprised" by his ouster, "particularly in the light of a board meeting we had on June 20, that was not their position then," when they discussed half year numbers.