By ruling that Morgan Stanley cannot hold stakes in two securities joint ventures at the same time, Beijing is forcing the bank to call time on a partnership with China International Capital Corp (CICC) that has been as controversial as it has lucrative.
Although Morgan Stanley helped set up CICC in 1995, taking a 34.3% stake, it hasn’t been an active partner for about seven years, after relations within the management team soured. The way in which it stepped back and opted for a passive role was, by all accounts, a dispiriting end to a project that was meant to install Morgan Stanley as Beijing’s investment bank of choice.
It remains an instructive case study for any foreign firm looking to team up with a Chinese partner.
Failings aside, the US bank has enjoyed a cut of CICC’s substantial earnings – the business of carving up state-owned enterprises (SOEs) for public listings has made CICC China’s top IPO underwriter for the past several years. Morgan Stanley can also look forward to receiving something in the region of US$1 billion for a holding that originally cost US$35 million.
If all goes to plan, Morgan Stanley will go into business with China Fortune Securities, a venture in which it will no doubt play a far more active role in the underwriting process. Indeed, Morgan Stanley was one of several foreign players said to be in talks with local brokerages before Beijing shut them out of the sector in 2006, a ban that has only just been lifted.
The question on everyone’s lips is who will buy the CICC stake. Several US private equity firms have been linked to the holding, but it is difficult to see Beijing giving the green light to any investor that didn’t bring some industry expertise to the table. Private equity has found China’s financial sector a tough nut to crack, with one or two exceptions.
CICC can point to its record and say it no longer needs foreign guidance on how to run an IPO. But it could also be argued that the firm is operating in an unrealistic market: CICC has been a shoo-in for underwriting duties on SOE listings, and such is the demand for shares that few IPOs struggle.
In a more volatile market, when a large number of smaller, often privately-run companies start listing, the terrain becomes that much harder to navigate. There is also the prospect of increased competition from domestic brokerages as well as from the foreign-invested joint ventures. Swiss bank UBS, now in control of the re-launched Beijing Securities, has handled three times as many deals in 2007 as it did in 2006. Total capital raised was up to US$16.3 billion from US$6.1 billion.
Looking even further ahead, if CICC is going to consolidate its claim to be China’s one true investment bank it will need to diversify its business and operate in other markets. The tie-up between CITIC Securities and Bear Stearns involves a commitment to set up an Asian investment banking joint venture. Perhaps CICC should seek out a foreign replacement for Morgan Stanley with a view to doing the same.