By Wang Yanhua, China Business Feature
BEIJING - China Merchants Bank (CMB), the Mainland's fifth largest listed
bank, made a major decision to be "first", again. This time it cost CMB
RMB17.2 billion (US$2.5 billion) to obtain 53.12% of Wing Lung Bank
Ltd. (WLB), a family-run bank in Hong Kong. The controlling Wu family
sold WLB, which they built and have been operating with painstaking
effort for 75 years, to CMB at HK$156.5 (US$20) per share. CMB
triggered a legal takeover offer. So based on the share price, CMB had
to pay RMB32.4 billion (US$4.2 billion) for the acquisition, almost the
first knock out offer. This is all taking place while China's homegrown
banks "go global". The offer was, however, the most expensive lender
acquisition in Hong Kong's banking sector since the Development Bank of
Singapore (DBS) bought Dao Heng Bank in 2001.
Insiders thought
CMB had emptied its pockets with the high price. They also thought the
return of shareholders would be diluted for a long time and it would
take CMB at least five years to recover its investment. Merrill Lynch,
Goldman Sachs, HSBC and others downgraded the ratings of CMB H-shares
to "market weight", while Standard & Poor's put CMB on review for a
credit-rating downgrade.
CMB itself, however, thinks the
acquisition a "very exciting" event. Qin Xiao, the chairman of CMB,
said it's a strategic move and "an important milestone in the history
of CMB". The acquisition allows CMB to enter Hong Kong, a highly
developed market of great strategic significance.
This may be
the reason why CMB made up its mind to win. Since CMB had one office in
Hong Kong, much less than the country's largest lender Industrial and
Commercial Bank of China (ICBC), it's obvious that CMB was more
insistent in acquiring a local in Hong Kong bank. But will CMB get what
it wanted after paying such a high price for Wing Lung?
CMB's Needs
China's
booming economy has produced a great many companies that want to go
global. The soaring market capitalization of banks has also provided
capital support for lenders eyeing going global. Data shows that five
Chinese banks invested in nine foreign financial institutions, seven
opened 60 branches overseas, and total overseas assets reached US$267.4
billion by the end of 2007. ICBC has been searching for sellers all
over the world, China Development Bank (CDB) bought shares in Barclays,
and Citic Bank struck a deal with Bear Stearns... China's banking has
been "testing the water" frequently overseas.
Zhou Xiaochuan,
the governor of the People's Bank of China, the central bank, said the
authorities have developed favorable policies to support China's
homegrown banks in M&As overseas. He also said China's commercial
banks are encouraged to set up branches overseas and to try to buy
stakes of foreign financial institutions, and then provide financial
services for China's homegrown enterprises that want to "go global".
On
top of the financial services available to China's homegrown
enterprises overseas, there's a chance globalization could shift
operational risks to international markets. "Enterprises are given
great opportunities in the fast expanding domestic economy and improved
domestic financial environment, and also face formidable challenges of
unstable factors and operational risks in the international market,"
CMB's 2007 Fiscal Report stated.
There are two ways Chinese banks go global. "One is entering international markets through Hong Kong, and the other is acquiring interests in foreign banks," Li Yamin, analyst of Shenyin Wanguo Research & Consulting, China's leading financial research firm. ICBC and China Construction Bank (CCB) adopted the former approach; and some others the latter. For example, China Minsheng Banking Limited directly bought stakes in UCBC Holdings, Inc.-the first deal that saw a Chinese bank investing in a US peer.
CMB, known as "the maker of sensational news" in the banking industry, has been premeditating its globalization for a long time. The branch it set up in New York City is China's first bank branch since the founding of the People's Republic of China in 1949. It is also the result of 16 years of hard work. But CMB is not satisfied with only an overseas branch for its globalization. More than a decade ago, CMB showed that it had innovation and leadership in its bones. But after its "all-in-one card" and "all-in-one net", CMB's position as a leader in the sector was diluted because the "shelf life" of bank products has become shorter and shorter and the uniqueness of those products less and less obvious. CMB was the pioneer; now everybody else follows. But CMB now has to find a new way to enhance its leading position.
CMB discussed its expectations for 2008 like this. "The Company will continue its strategic operational transformation and globalization of management," noted CMB President Ma Weihua. He also noted that the bank would make more effort to expand overseas and in Hong Kong. Qin Xiao, the chairman of CMB, also said in March 2008 that CMB yearned for an acquisition in Hong Kong, when the Wu family said they wanted to sell stakes in Wing Lung Bank.
CMB would have to go global while making stable achievements at home. Its acquisition of a local bank in Hong Kong was a necessary step since Hong Kong is an international financial center that neighbors Shenzhen. "It was only a matter of time until we made the acquisition," said an analyst. The Wu family's sale of Wing Lung Bank also offered a golden opportunity for CMB.
Wing Lung, "the Hot Cake"
Early in March 2008, when the Wu family announced their decision to sell stakes of Wing Lung, CMB was one of the first bidders. Participants in the first round of bidding also included ICBC, CCB, Australia and New Zealand Banking Group Limited (ANZ) and other big names.
ICBC hoped to get its hands on branches of Wing Lung by acquiring the bank, and to make it more competitive in Hong Kong. Michael Smith, the president of ANZ and president of HSBC Asia Pacific, wanted to obtain more space for ANZ to expand in Asia by buying Wing Lung.
ICBC Asia had a relatively stronger footprint in Hong Kong; CCB thought the price of Wing Lung was too high; and Bank of Communications' branches overlapped with of Wing Lung. CMB, meanwhile, only had one branch in Hong Kong, which meant Wing Lung meant much more to CMB than to other banks。
The net earnings of WLB in 2007 were HK$1.314 billion (US$169 million). As for its scale at the end of 2007, WLB was only 6% of CMB. "In the short term, the acquisition can only affect CMB to a very limited extent," critics held. In other words, buying WLB would not affect CMB so much as for its book value. Data showed that when taking over WLB, the earnings per share would be killed by the cost for paying bond interest issued by CMB, and the return on investment in the acquisition would only be between 3% and 4%.
CMB seemingly quit after the first round of bidding, but delivered a surprise back thrust. Rumor had it that CMB talked face to face with the Wu family with the help of JP Morgan Chase, the financial advisor, which resulted in the two parties entering exclusive negotiations. According to the analysis report of Industrial Securities, CMB made its acquisition decision for at least four reasons:
The first was local presence. WLB had 35 branches and 41 ATMs in Hong Kong, and operated branches in Los Angeles and the Cayman Islands. The second reason was WLB's operational excellence. WLB has had a vast customer base after decades of focus in Hong Kong. It made money from diversified sources and was highly experienced in wealth management and financial services. The non-interest earnings were of high percentage of its total revenue, and it was strong as for overall profitability. WLB's non-interest earnings were 36.3% of the total in 2007, the highest among all Hong Kong-based banks, while its return on total assets 1.54%, second highest. Its cost-earning rate was the lowest, devalued loans 0.26%, and capital adequacy ratio 14.7%. The third was business diversification. WLB had been making profit from many sources by providing a variety of products and services. And the last reason was its expected synergy. CMB and WLB complement to each other. CMB planned to connect the financial market of mainland China with that of Hong Kong by taking advantage of the footprint and customer base of WLB in Hong Kong, and to cross-sell between customers of the two banks, and then to support product innovation and improvement of services, i.e. to achieve synergy.
WLB also does securities breaking and insurance business, and has recently entered the wealth management field. An analyst at an investment bank thought WLB could contribute its experience in providing services to small and medium-sized enterprises (SMEs), while CMB could offer banking and securities breaking services to Mainland's top-end customers who are operating in Hong Kong. In this case, CMB is satisfied because it always wants to be a bank delivering diversified services. After the deal, not only will CMB no longer be inadequate in presence, but also successfully complete itself as a financial conglomerate together with its CMB International Co., Ltd., China Merchants Securities and other subsidiaries in Hong Kong.
Another reason why CMB acquired WLB was that "there are not so many targets whose control right may be acquired in Hong Kong anymore", in addition that CMB wanted to go global. Li Yamin, the analyst with Shenyin Wanguo said that the top three banks are banks of issue, so only others may be allowed to get acquired, including Wing Hang Bank, Dah Sing Bank, Chong Hing Bank and others, among which Wing Lung was the one showing much interest in the Mainland market. WLB Shanghai opened on Feb. 18, 2008. Michael Po-ko Wu, the chairman of WLB, regarded the three economically developed regions, i.e. Yangtze River Delta, Pearl River Delta, and the coastline of Bohai Sea, as the important targets for WLB to expand in the future.
Post Acquisition Blues
CMB wants a return on its investment; WLB, meanwhile, has to make its new owner global, which is far from simple. First and foremost, a foreign bank manager said, "CMB has to address the challenges of integrating cultures, technologies and management of the two parties."
But CMB can refer to acquisitions in other sectors: China's leading household electronics maker TCL has so far been unable to get rid of the trouble brought by its acquisition of French company Thomson, which made TCL less profitable and less valuable in the market. German workers, for example, condemned Benq, a Taiwanese consumer electronics manufacturer, after it acquired Siemens Mobile and then filed for bankruptcy.
But WLB may bring CMB even more problems. "Any institution has to be big enough to achieve economy of scale in the financial sector, in which many processes can be copied. The institution would be powerful when it generates economies of scale," said Li Yamin. She also said it is cultural integration, rather than processes, that is the biggest headache for acquisitions in the financial sector. And it's also a stunning challenge for banks to communicate with individual and business customers, to find potential customers, and to get the most from customers. For example, even after setting foot in the US market, China Minsheng Banking is still providing services mainly to Chinese overseas.
But CMB, which is used to trying new things, seems well prepared for all the problems ahead. The anecdote goes that CMB won the bid actually because of its "sincerity". Some reports showed that, the final price HK$156.5 (US$20) a share was not much higher than that during the first round of bidding. During negotiations, the Wu family said they treasured the 75-year-old brand of WLB and wanted CMB to retain the management and workforce.
CMB originally stated that no WLB employees would be dismissed until at least 18 months after the deal.
Some think CMB is "resolute", some say it's "smart". This time CMB bet everything it had on WLB, whose value was obvious before the acquisition. But the ability to integrate depends on CMB's ability to integrate with WLB.
The Wu family relinquished its 75-year hold on WLB by telling customers in a notice that "WLB has entered a new era", and, "having become a subsidiary of CMB, WLB would benefit in many ways, including financial strength, services, product innovation, IT facilities..."
Observers on the Internet looked at the acquisition this way: the result would be hard to determine since CMB over-drafted its future performance for the biggest acquisition in history. Some cautious people thought that CMB wouldn't be able to deliver a quality performance within a short time after the acquisition, it takes time for the two parties to integrate, and only time will tell if they can achieve synergy: "Nothing will be clear until WLB delists from the stock market."