Is Management Risk A Threat To Value At Barclays PLC?

Investors reacted positively to the news that Antony Jenkins had left Barclays (LSE: BARC) (NYSE: BCS.US) last week. He was pushed, but that’s not the important part of the story: what counts is whether shareholder value is up for grabs right now. 

Well, if history is a guide, the celebration may be short-lived…

Uncertainty

The bank “may not pick its next chief executive until early next year, potentially leaving new Chairman John McFarlane in charge for at least eight months“, Reuters reported on Friday. When such stories emerge, they are rarely welcomed by the market. 

Mr McFarlane may lead the show for longer, however, and that’s likely the reason why Barclays has outperformed its rivals on the stock exchange since the announcement was made on 8 July.

For the record: at 273.8p, its stock currently trades in line with the 52-week high of 276.62p that it recorded on 24 June. 

Antony Jenkins

Mr Jenkins was appointed on 30 August 2012.  Barclays stock had appreciated by almost 50% during his tenure, but most of the gains were recorded in the first five months of trade, meaning that anybody who had invested in Barclays at around 300p a share between February and May 2013 would have so far recorded a paper loss of about 9%, only partly mitigated by dividends.

Academic research shows that when a management shake-up occurs, shareholder value is likely to be up for grabs for some time, but favourable trading conditions tend not not last unless proper changes are implemented. And in this environment, there aren’t many ways to deliver value at Barclays, really.

“New leadership is required to accelerate the pace of execution going forward,” Barclays said last week, adding that the departure of Mr Jenkins “does not signal any major change in strategy“. Hence, relentless cost-cutting will continue — that, at least, emerges from the release.

“If so, we might hear about thousand of job cuts at the end of the month,” a London-based banker told me today (its interim results will be released on 29 July).

John McFarlane

“Barclays is not efficient, we are not productive, we are cumbersome“, Mr McFarlane told the BBC last week. 

He doesn’t have an easy task. Mr McFarlane must improve returns while maintaining competitiveness and boosting the valuation of a stock that is still significantly overvalued at its current levels, in my view, based on fundamentals and trading metrics. 

Here’s another problem: investors seem to be betting on Mr McFarlane, but if he fails there will not be many executives around who would be able to lead Barclays and push its equity valuation closer to 400p rather than to 200p. Since the collapse of Lehman Brothers, the stock has traded in the 200p/300p range —  and I doubt that a faster pace of execution alone will solve its problems.