In the early 1990s, I was a bank analyst at DLJ and Mike Mayo, working at the Fed at that time, interviewed with me for a job as an assistant. He was aggressive, hungry, and understood bank regulation—but it was clear that he had no clue about the challenges of actually managing a bank or the challenges of investing in one. I didn’t hire him.
That didn’t seem to slow Mayo down, though. He has since gone on to a long career as a high-profile sell-side analyst. I’ve always liked Mayo personally, but based on comments he’s made over the years, I still don’t think he’s gained much understanding about the challenges of managing a large banking institution or of being a successful long-term investor.
All this was underscored to me over the weekend when I read in the Wall Street Journal that Mayo has lately taken to being something of an activist. In particular, he’s not pleased with the recent performance at Comerica, and believes the company should put itself up for sale. Imagine this: after oil prices have fallen by 60% over the past two years and the industry rig count down by 51% over the past year alone, a Dallas-based commercial bank’s earnings have fallen on account of higher loan-loss provision tied to its energy-related loans There’s a shocker!
If anything, Comerica’s recent results might be viewed somewhat positively. Despite the crash of the energy economy, the company is still profitable and has a strong capital position. Management is doing what it’s supposed to be doing: managing through the energy cycle.
But, oddly, Mayo says that’s not good enough. He and a handful of activist investors apparently think that, since the company posted just a 3% ROE in the first quarter and since its stock has lagged the KBW Banking Index, the board of directors should give up and seek a buyer. “Mr. Mayo, a managing director at CLSA,” reports the Journal, “said he wants to take a more active role as an analyst. ‘This is just how the job should be done,’ he said in an interview.” Hold on a minute. Mayo’s been at this for 25 years, and now he suddenly comes out with this holier-than-thou “This is just how the job should be done”? Really Mike?
I disagree with Mayo totally: Comerica should not be considering a sale at this point in the energy cycle. As at all banks between $10 billion and $1 trillion, managements need to make a distinction between the short-term cycle (in this case, of energy prices) and the long-term secular changes taking place in banking, which are massive and challenging. Mayo wants the board to overreact to the former, yet I’ve never heard him discuss the latter.
Comerica’s annual shareholder meeting is Tuesday; Mayo says he is going. I assume he owns a few shares, so he’s entitled to pontificate. The board is entitled to thank him for his comments, but then suggest that it can create more shareholder value by guiding management through a cyclical energy slowdown and improving its long-term strategic position.
If instead the board takes Mayo’s misguided advices and does put the company up for sale, it would be doing shareholders a serious disservice and would be yielding to a lamentable instance of short-termism.
What do you think? Let me know!