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Should a media giant – even Facebook – aspire to be a bank?

Facebook’s ambitions to launch its ‘Libra’ digital currency have echoes of the time, 32 years ago, when another high-profile media company had high hopes of expanding into the world of finance

17/10/2019

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Given it shares its name with the astrological sign of the Zodiac symbolised by a set of scales, it is perhaps appropriate the future of Facebook’s ‘Libra’ digital currency should now hang in the balance.

Only last week, the G7 group of the world’s most powerful nations warned such projects “pose challenges for competition and antitrust policies” and should not be allowed to proceed unless regulatory concerns are met.

The feeling Libra’s viability is still being weighed up is only enhanced by the range of opinion generated on the subject – for example, the same day last week brought the Financial Times’s cautiously positive Why Facebook’s Libra might be a good thing and the Guardian’s rather more negative How the wheels came off Facebook’s Libra project.

Here on The Value Perspective, meanwhile, we had an odd sense of déjà vu …

Have we been here before? Midland Bank...

The idea history does not so much repeat itself as rhyme is one we revisit from time to time – and one half of today’s couplet dates back to 1987 when advertising giant Saatchi & Saatchi tried to add Midland Bank to an already burgeoning shopping list.

The acquisition of what was then the UK’s fourth-largest bank, however, challenged the Saatchi brothers’ core mantra that “nothing is impossible”.

Maurice and Charles Saatchi and the firm they founded in 1970 received a lot of criticism for the bid but – in theory at least – it was not totally far-fetched. For one thing, Midland could likely have been snapped up at a bargain price – after all, when HSBC finally took it over in 1992, the deal valued the bank at £3.1bn, or 378p a share, which one high-profile analyst at the time suggested amounted to “the deal of the century”.

Furthermore, as the Saatchi brothers saw it, advertising and banking were at heart both ‘business services’ while, in contrast to Midland, which was desperately struggling to raise capital, Saatchi & Saatchi’s credit rating was good and it should have had no problem finding the necessary cash.

Ultimately, however, the Midland board concluded being owned by an ad agency would not be the solution to the bank’s problems.

To judge by the largely negative coverage of the potential tie-up, Midland’s directors were not the only people who were uncomfortable with the idea of a media company running a bank.

Yet regardless of how the deal played out – and the episode is generally seen as having convinced investors the Saatchi brothers’ days at the firm they founded were numbered – clearly Maurice and Charles felt it was a very good idea at the time.

Now, some three decades later, it seems pertinent to wonder if Facebook’s Libra plans will eventually come to be viewed as a similar kind of ‘corporate overreach’ as the Saatchi bid for a business that is now an integral part of the HSBC empire.

Despite ever-intensifying scrutiny from global regulators and politicians and reports of growing unease from some of its partners on the project, the powers that be at Facebook clearly continue to believe this move into the world of finance to be a very good idea indeed.

 

Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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