On the face of it, it was a convincing argument. In a series of behind-closed-doors meetings in Co Kerry, Brian McKiernan and Kyran McLaughlin, the chief executive and deputy chairman of the stockbroking firm Davy, attempted to explain to Brian McCarthy, the founder of Fexco, why he should merge the state’s oldest stockbroker, Goodbody, with its largest, Davy.

The meetings, which took place around March 2019, have never been reported on in detail before. At the time, they were known only to a handful of powerbrokers in Davy and to no one whatsoever directly within Goodbody.

In the meetings, the Davy executives held forth on the prospect of creating a national stockbroking and financial services champion to McCarthy, whose company’s Fexco owned 51 per cent of Goodbody.

Under the proposed deal, Fexco would sell its stake to Davy, and its business would be combined with Goodbody to create an unrivalled, dominant player in Ireland. Fexco would reinvest most of its proceeds from the sale in return for a 25 per cent shareholding in the combined stockbrokers which would drive on in to London and continental Europe.  

McLaughlin and McKiernan argued the virtues of the deal, including potential synergies that would involve clearing out many of the existing Goodbody team and replacing them with experts from Davy. Not everybody would be fired, but a sizable chunk of people could be let go as the Davy negotiators stressed that the firm’s considerable investment in technology would allow less people to do more.

There were other savings to be made also, Davy said, highlighting compliance as an area it claimed to be strong in.

When the meetings took place, March 2019, Goodbody was at a low ebb. A year before, it was on the cusp of a sale to a Chinese consortium, but the deal failed to materialise. Money and time had been spent on trying to do this deal, with Goodbody’s managing director Roy Barrett flying more than once to China to try to close it. Davy felt its rival was weak, so it moved in.

Davy’s McLaughlin and McKiernan presented McCarthy with an elegant solution. A combined Davy and Goodbody wouldn’t put Ireland in the premier league with the likes of Goldman Sachs and JP Morgan, but they argued it would be a big step towards becoming a significant European player.

Billed as a merger, in reality, it was a Davy takeover. The Goodbody name, which dates back to 1876, would eventually be consigned to the scrapheap of history just as happened to Ireland’s Bloxham, which had been the state’s oldest stockbroker before it was rolled into Davy in 2012 following an accounting scandal.

Fexco, however, would retain a chunky stake in a rising power. Down the road, there was the potential for a big payday through a stock market listing or a tie-up with a larger player.

The deal was low risk, Davy said, adding that the Central Bank could be squared off along with any other regulatory or competition concerns. It claimed to have government support too, according to well-placed sources.  

This was going to be big. What was not to like?

Aghast, Goodbody call a senior counsel

At some point around April 2019, Goodbody got wind of what was going on. Roy Barrett sat on the board of Fexco, and he was shocked that Brian McCarthy, who chaired this board, would engage at all with Davy without telling him. He made this clear to McCarthy, who assured him the meetings were only very preliminary in nature. If they had progressed it would have been brought to his attention, Barrett was told.

The team at Goodbody didn’t see it that way. The stockbroker felt that it had delivered for Fexco since the Kerry based financial services company had acquired it for a bargain €24 million at the bottom of the market in 2010. Barrett and his senior team including Brian O’Kelly, co-head of investment banking corporate advisory, and Stephen Donovan, co-head of investment banking capital markets, made it clear to Fexco that they weren’t happy. Culturally, they argued, Davy was a bad fit. 

Goodbody asked a senior counsel to advise the broker. He was asked to tell Goodbody’s management what it could do as a 49 per cent shareholder to block a sale to Davy. He was asked to consider the risks too of Davy taking control.

One of the risks identified was the then-ongoing investigation by the Central Bank into Davy in relation to the sale of Anglo bonds for a client. Goodbody felt this deal was a reputational risk, but it didn’t have all the information required to understand fully how serious it was. 

Davy, which knew everything about the Anglo bond deal, didn’t agree the investigation was a big risk. It was just another bump in the road for a firm that had shrugged off controversies before. It dismissed all the other arguments too against it.

It all got a bit heated. Goodbody was dead against Davy, but Fexco didn’t want to rule anything out.

To resolve matters Fexco and Goodbody agreed to restart a process to sell the stockbroker. Davy was allowed to bid, but it would have to go up against all-comers.

Dynamism, caution and control

Roy Barrett
Goodbody’s Roy Barrett.

Roy Barrett joined Goodbody in January 1995, a year after Dermot Desmond sold the stockbroker that he co-founded, NCB, to Ulster Bank. Barrett worked for a time under Michael Buckley in NCB. Buckley would leave for AIB in 1991, and a decade later, he would be elevated to the role of chief executive.

Barrett’s rise in Goodbody, which was owned at the time by AIB, was swift. By April 1996, he was its managing partner. He was only 32 taking over a firm that was then 120 years old.

It was a bit of a gamble for such a storied firm to go with Barrett, but the firm felt his youth and intelligence might shake-up the broker. It would be easy enough to move him on if things didn’t work out, the board agreed at the time.

Barrett, however, did well. He did not have a big ego, and while he wanted to make money, it was not at all costs. He developed financial expertise within Goodbody, and his management style fostered loyalty as he gave his team autonomy rather than leadership through micro-management.

In 1998, Colin Hunt, the current chief executive of AIB, joined him as chief economist and research director until he left to become a government advisor in 2004. Goodbody was a solid number two in the market. 

Compared with his dynamic rivals on Dawson Street, Barrett was seen as too cautious.

The more aggressive Davy was the clear number one. Led by Tony Garry from 1993 on, the business was perceived as sharper, combining veterans like Brian Davy and Kryan McLaughlin with hungry rising stars like Brian McKiernan. From 2001, McKiernan became the rising force in Davy as he grew its wealth and asset management business into being the most important part of its business.

Goodbody was growing too in core areas like equities, corporate finance and private wealth management. But it just couldn’t catch Davy. 

Barrett however was politically savvy, and he managed to always keep Goodbody a relatively autonomous unit within AIB. He made sure Goodbody operated from a separate building rather than being subsumed into the AIB campus.

Goodbody’s staff were well paid and earned generous bonuses, as was consistent in banks and stockbrokers from 2000 and throughout the boom.

Barrett and his senior team could see the value they were creating, and they wanted an equity stake in the firm. They tried to convince AIB to give them an equity or quasi-equity shareholding in Goodbody, but AIB kept knocking these proposals down. AIB had its own concerns notably the fallout of the $691 million John Rusnak trading fraud in 2002 that happened in its United States business.

In 2006, Davy was subject to a management buyout from Bank of Ireland. The deal valued the business at over €300 million. In January 2007, Tony Garry, the chief executive of Davy, revealed just how ambitious his firm was in an interview with The Irish Times.

“Most companies, when you say, what do you hope to do, in the next five years, you’d say you’d like to double pre-tax. In that context, €100 million sounds like a nice figure in terms of a four or five-year timespan,” he said.

Garry presented Davy as being cautious. In the spring of 2007 as Irish banking and other stocks peaked he told a UCD alumni magazine that: “We’re not going to do anything dramatically different. We’ve built a good business and a good brand and, to date, we have enjoyed some success.”

Goodbody was doing well too. It recorded profits of over €65 million at the time. This was good but the value was being created was for AIB and not Goodbody staff.

Mutterings began that Goodbody was going to be left permanently behind Davy. Compared with his dynamic rivals on Dawson Street, Barrett was seen as too cautious.

Davy, Goodbody and the crash

As 2007 ended and 2008 began, the Irish property and stock market had begun to go into a steep decline. This put Davy’s senior staff under serious pressure as not only was the value of many of their personal investments deteriorating but they had also borrowed huge sums from Anglo Irish Bank to fund their MBO. Others had put their historic bonuses from Davy into Bank of Ireland shares which disintegrated in value.

Suddenly, Barrett’s relative carefulness and inability to convince AIB to allow his team to buy equity in Goodbody at the peak of the market looked much better.

Like everybody in their industry most Goodbody staff lost money during the crash. Their clients did also; mistakes were made advising them to get involved in property syndicates, development land, and so on. But these were mistakes that happened everywhere else too.

Things were very bad, but it was not as bad as what was happening in Davy, with many of the executives who participated in the leveraged MBO under fierce pressure to make more money in a falling market because of their personal circumstances.

Barrett, who had become a non-executive of director in ISTC, a firm set up to lend capital to banks, saw that business go bust with a shortfall of €871 million. It was a cursory lesson.

Like so many others in Irish stockbroking, Barrett did not predict the crash, and he felt the pain of it.

It wasn’t pleasant but Goodbody picked itself back up. It tried to help its clients work through it, but it was losing money, and bonuses for staff became a distant memory.

AIB, its parent, was in far worse shape. It was completely ill-prepared for the financial crash. A sprawling overextended bank, it required a multibillion-euro bailout and a state guarantee to prevent it from going bust. To this day, the state remains its dominant shareholder.  

AIB was forced to sell good businesses it had built up and invested in Poland and the United States as it desperately tried to raise cash. Lossmaking Goodbody became seen as a non-core part of AIB, putting it potentially into play.

*****

It is hard to know exactly how Roy Barrett met Brian McCarthy of Fexco. McCarthy was a former AIB employee in the 1970s and his business was a long-term customer of the bank. Fexco was profitable and cash-rich, and despite the financial crash, was hunting for acquisitions. 

It had a small execution only stockbroking business at the time. But the Central Bank was making it more onerous to be in stock brokering as a result of the crisis so Fexco was thinking of getting out of it.

The story goes that McCarthy bumped into a friend in Killorglin to discuss selling Fexco’s stockbroking licence. Over drinks, his friend, who was also a confidante of Barrett, suggested to him to consider buying Goodbody instead. McCarthy said he would think about it. These social drinks were the seeds of a new chapter in the history of Goodbody.

*****

What started as Fexco thinking about selling its small stock brokering business ended with it buying Ireland’s oldest stockbroker. Barrett and McCarthy began to talk about whether their two businesses could work together sometime in 2010. A cautious approach was made to AIB.

Senior AIB bankers didn’t view McCarthy’s bid as opportunistic. Instead, they questioned his rationale, even sanity for wanting to get involved in stockbroking and wealth management in the eye of an unrelenting economic storm.

AIB didn’t see the potential for Goodbody to grow if Ireland’s economic fortunes turned and its staff were financially motivated to expand the business. 

McCarthy’s vision to do a deal with Barrett and his team had paid off in spades, with still more to come.

McCarthy had former NTMA chief executive Michael Somers and former Tanaiste Dick Spring on his Fexco board. Spring was also on the board of AIB at the time.

McCarthy was challenged by his non-executives about the wisdom of buying Goodbody as Fexco was seen as a business firmly rooted in Killorglin rather than Dublin 4, home to Goodbody.

In February 2009 Fexco had netted $159.5 million in cash by selling its money transfer business to Western Union and buying out Western Union’s 25 per cent stake in the Kerry business. There was a view among some in Fexco that it might be best to sit on this cash and wait for better opportunities rather than risk it on Goodbody.

But McCarthy and Barrett pressed on, and AIB began talking to Fexco about a sale.

It didn’t run a sale process. There had been a few unsolicited approaches for Goodbody, but they were from bottom feeders. Fexco, meanwhile, was respected by AIB.

Maybe AIB should have run a sales process for Goodbody but equally the appetite to buy a loss making relatively small stockbroker in a bust Ireland would not have been much.

Eventually, AIB agreed to sell Goodbody to Fexco for just €24 million in 2010. The price paid was essentially Goodbody’s book value at the time.

There were various anti-embarrassment clauses preventing a quick flip, but these expired by the time Goodbody’s fortunes began to seriously turn.

Not much consideration was given by AIB when it sold Goodbody to the stockbroker’s stake in the Irish Stock Exchange. If and when the market recovered, that would become very valuable.

Fexco now had total control of Goodbody. McCarthy then did an even smarter deal with Barrett. He gave Goodbody’s team an equity ratchet so that if they hit specific targets which got his business into a neutral position in terms of their acquisition and costs.

The Central Bank was supportive, as it felt Fexco’s strong balance sheet was a good home for Goodbody. It was one less headache for the regulator.

As Ireland recovered, Goodbody hit its targets and its employees gradually built their stake up to 49 per cent. They were highly motivated to restructure and grow the business, which they did.

McCarthy’s vision to do a deal with Barrett and his team had paid off in spades, with still more to come.

Enter two former Anglo bankers, and a Chinese suitor

In 2018 Goodbody made €45 million from the sale of its 26.2 per cent stake in the Irish Stock Exchange to Euronext. Half of this was due to Fexco, but the cash was left on Goobody’s balance sheet and not paid out as a dividend. This was a prudent thing to do as the money was available to Fexco if it needed it.

Even before the stock exchange sale, Fexco was already well into the black. It had recouped back all of its money and more in dividends and other payments. 

In 2019, a decision was taken to sell Goodbody. Goodbody wanted to get bigger and at the same time some senior staff were interested in exiting due to the stage they were in their lives. The stock exchange windfall made it seem like a good time for everyone to sell.

There were divisions, as can happen between any partners, over business strategy. These weren’t serious, but it was another factor pushing the partners to sell Goodbody.

Unexpectedly a buyer came on the horizon when a Chinese consortia with Irish links approached the business.

This approach originated with two former Anglo Irish Bank executives called Mark Daly and James Ferris. Daly had worked in the private banking arm of Anglo Irish Banking from 2004 until he left in January 2007 to join NCB. In 2012 NCB was bought by Investec and Daly was made head of property.

In 2012 he joined a Chinese financial company called the Zhongze Group, opening up his horizons to the vast wealth looking for a home in Europe in the Far East.

Relations between Goodbody and Fexco had deteriorated post the Kerry meetings with Davy and both sides now wanted a sale.

Daly knew Ferris from his Anglo days, and both had gone on similar career journeys. Ferris joined Anglo Irish Bank’s treasury team before moving into its private banking arm.

He then went to work for Arrow Asset Management, a real estate company set up to help funds work through the vast loan books they were buying from Irish banks and state entities. 

In January 2016 Ferris became director of investments at Zhong Ze Culture Investment Holdings. This company is linked to the state-owned Chinese aerospace, defence and electronics company.

Around the summer of 2016, Daly and Ferris read a newspaper report that Investec was trying to buy Goodbody. Barrett told staff that there was no substance to the rumours. This was true when he said, but Investec had taken a preliminary look at Goodbody sometime earlier when weighing up whether to sell or scale up its wealth business in Ireland. The newspaper report got Daly and Ferris thinking. They were on the lookout for deals in Europe for Chinese investors.

Ferris decided to pick up the phone and give Goodbody a call to see if it was interested.

James Ferris and the ripple effect that changed Irish stockbroking

The ripple effect occurs when an initial disturbance to a system propagates outward to disturb an increasingly large portion of the system.

When the history of Irish stockbroking is written, James Ferris will deserve more than a footnote, although nobody could have predicted the impact he would inadvertently have – not just on Goodbody but on Davy also.

His call to Roy Barrett would put Goodbody firmly in play, leading to its eventual sale in 2021.

A second call James Ferris made in 2014 to the developer Paddy Kearney would have a greater impact still. Ferris was working with a company called Arrow which, at the time, had been tasked by the vulture fund CarVal with collecting as much money as it could after it acquired a portfolio of loans from the former Anglo Irish Bank.

Ferris asked Kearney could he repay a loan secured on Anglo bonds, with a face value €27 million, that Carval had acquired.

Ferris’ call would cause Kearney to ring his then friend, a former Anglo banker called Tom Browne to help him. Browne would in turn ring his friend a Davy bond trader called Tony O’Connor asking him to sell Kearney’s Anglo bonds.

Unknown to Kearney, O’Connor would end up personally buying his Anglo bonds along with 15 other Davy employees who would become known as the Davy 16.

The manner in which this deal was done would lead to Davy being fined €4.1 million by the Central Bank and in less than two weeks Rothschild being appointed to sell the stockbroker.

The actions of individuals can have far reaching effects. In the case of Ferris both of these effects came to a head on the same day Tuesday March 1, 2021.

*****

The Chinese plan was still being enacted. Mark Daly, James Ferris and their Chinese backers believed that Goodbody could become a gateway for the world’s second largest economy into Europe.

The Chinese were already investing considerable amounts in Ireland via various companies including Bartra, a property company founded by Roy Barrett’s cousin Richard, so it was obviously exciting.

Bank of China agreed to provide the debt, while the equity was to come from private investors.

For Goodbody, the deal was also attractive because unlike an acquirer with an existing presence in Europe, a Chinese buyer would likely not only keep all of Goodbody’s jobs in Dublin but add to them. 

Fexco allowed the talks to progress with the understanding it would only sell out at a reasonable price. The Central Bank was not unsupportive of the deal, but it did have lots of questions. As time went on the make-up of the equity side of the deal kept changing. Every time this happened it set the deal back from a regulatory and a timing perspective.

Eventually, in frustration Goodbody pulled the plug on talks with the Chinese consortia in early 2019. It was back to square one in the sales process.

*****

Another Chinese bidder

It was at this moment of perceived weakness, that Davy tried to pounce with its visits to Kerry. Goodbody insisted on a formal process. There was a long list of about a dozen interested parties, but this was whittled down to three: Bank of China, Irish Life and Davy.

Bank of China had done a lot of the work already as debt providers to the Chinese consortium, but now it was ready to go it alone. It had opened an office on Hatch Street in Dublin 2 in 2017 so it had people on the ground to do the deal.

Bank of China is one of the big four banks in China, and its most international in outlook with operations in more than 50 countries. Irish Life is part of Canadian giant Great-West Lifeco Group; it too was a serious bidder too.

Irish Life wanted Goodbody’s private client business and was prepared to pay a premium for it, but it wasn’t as interested in the capital markets part of its business. Advised by IBI however it came up with a structure to allow it to make a strong bid. There were fears though in Goodbody that a lot of what it did such as corporate finance and stockbroking wasn’t of long-term interest to Irish Life.

Davy was again a strong bidder, but as before, Goodbody’s management was dead against it. Relations between Goodbody and Fexco had deteriorated post the Kerry meetings with Davy and both sides now wanted a sale. Bank of China’s bid at €155 million was the highest but it also had execution risk. On balance, a decision was made to go with it.  

Another Chinese exit, and back to the mothership

Bank of China’s selection as preferred bidder was welcomed by staff, but the deal would take some time to close as it needed regulatory approval. Covid-19 caused the Bank of China to pull out of the deal. This had been rumoured for sometime, but confirmed on July 10 2020 when Goodbody said: “Bank of China has now informed Goodbody that, due to the unprecedented global impacts and uncertainty caused by Covid-19, it is not in a position to complete its proposed acquisition of Goodbody at this time. As a result the proposed transaction has been terminated.”

This was not good news for a variety of reasons, including the estimated €5 million Goodbody spent on legal and other bills to get the deal done. Bank of China later indicated however it would be prepared to pay these bills, but it would be months before this became clear.

This British Virgin Islands structure is entirely legal and not a secret, but it was still a concern as AIB was a state owned bank buying Goodbody.

The other impact of Covid-19 was that it placed Fexco under huge pressure because of its exposure to travel and the foreign exchange sector. It was forced to let 150 staff go and suddenly it needed the money generated from a Goodbody sale. Fexco’s exposure to the travel sector has led to speculation it could have lost over €50 million in 2020; 2021 is also looking challenging. 

As The Currency first reported in mid-August, AIB now came on to the stage. Barrett engaged directly with his former colleague AIB’s chief executive Colin Hunt to discuss what that deal might look like.

Davy when it got wind of this again tried to get back into the running, but this time it was not entertained.

All shareholders in Goodbody favoured AIB, provided the issue of a cap on bonuses for employees in the majority state owned bank could be dealt with and this matter would require government approval.

AIB was eager to do the deal. It valued the fee income generated by Goodbody, and it wanted a strong wealth management business as a negative interest rate environment caused the well-heeled to move out of cash in large volumes.

Goodbody was a potential new source of income for a bank struggling to tell a compelling growth story. It had raised €12 billion in capital markets in the previous five years, was a corporate broker to companies like Greencore and Draper Espirit, had an active equity desk and a boutique fixed income business. Its wealth business was particularly attractive to a bank forced to charge holders of large amounts of cash negative interest rates.

AIB had previously tried to buy Investec’s wealth management division, but failed in part because it couldn’t resolve the issue of bonuses. As a result, Brewin Dolphin had bought the business, and as this became a success this drove home to AIB what it had missed out on.

Talks rapidly moved towards exclusivity between AIB and Goodbody, and behind the scenes there was extensive engagement with the Department of Finance around the issues of bonuses.

In December 2020 Goodbody repaid €450,000 of Covid-19 salary support to the State.

Goodbody had applied for the scheme as its majority shareholder Fexco’s revenue had plummeted. The stockbroker however after an uncertain period had thrived. The decision to make a repayment a spokesperson said “is totally unrelated to any of the current speculated discussions” around a takeover.

While this is what Goodbody said, it made a lot of sense from a goodwill perspective to repay the state. Indeed, the fact that the broker had applied at all was a source of frustration in government circles. However, the state was broadly supportive of the deal, as it meant a cash injection for Fexco, a significant employer in the southwest of Ireland, and it strengthened AIB.  

Read confidential details of the financial performance of Goodbody in recent years.

Under the terms of the deal agreed between Goodbody and AIB, and approved by 71 per cent shareholder the state, the current contracts of Goodbody staff – including bonuses and salaries – will be retained. Plus, about 30 AIB corporate finance and wealth management staff will transfer to Goodbody Stockbrokers by the end of next year and benefit from the brokerage’s variable pay policy. Over time more can move over from AIB to Goodbody, but only a small number a year and subject to strict government approval.

This is important too however for AIB which has complained in the past about being unable to retain its best staff due to bonus restrictions.

Timing matters

Timing is everything in stockbroking. On March 2 AIB closed its acquisition of Goodbody for €138 million. It did the deal just a short while after Minister for Finance Paschal Donohoe and his team signed off on a mechanism allowing Goodbody’s retain its pay and bonus structures. Politically, if the Davy scandal had broken sooner, he might not have been able to unlock the greatest barrier to a sale to AIB.

Fexco bought Goodbody through its wholly-owned subsidiary Ganmac Holdings (BVI) Limited. This British Virgin Islands structure is entirely legal and not a secret, but it was still a concern as AIB was a state-owned bank buying Goodbody.

Goodbody’s staff shares of 49 per cent are all based in Ireland, but a BVI structure could have led to awkward questions. The reality is though that whatever about the structure, the proceeds of the Goodbody sale will flow back to Kerry. Fexco will make close to €70 million from the sale of Goodbody which it will use to support the business as it seeks new revenue streams and awaits the return of old ones once the world starts traveling again.

If Fexco had gone down the Davy route it might now have a 25 per cent stake in a business being sold in distressed circumstances. Or if the Davy scandal had broken sooner, the AIB deal for Goodbody might have been delayed or even killed off putting off its payday.

Instead, McCarthy’s bravery and vision to buy Goodbody in 2010 on the advice of a friend has delivered a much-welcomed cash injection in the middle of a global pandemic.

*****

For Roy Barrett, the sale of Goodbody marks almost the end of a 25-year journey as he has said he will leave the business once the deal is finalised. It certainly wasn’t always easy steering the Goodbody ship, but he has been in many ways vindicated. His decision with his team to oppose a sale to Davy was the right one, and the less aggressive culture he instilled in Goodbody has proven to be more sustainable. He leaves Goodbody well-liked and with his reputation intact; in stark contrast to his rivals in Davy who departed in scandal and ignominy. Now all he has to do is fix the FAI as its chairman.