No one is in any doubt about the potential power of Chinese outbound investment. It now appears that the heady days of 2005, when Lenovo bought IBM’s PC division and political pressure sank China National Offshore Oil Corp’s bid for Unocal, was just a taster of what was to come.
As of the end of September, China’s state investment agency was officially up and running – having already jumped the gun a few months back with its purchase of a US$3 billion stake in Blackstone. Meanwhile, Chinese tech firm Huawei was ruffling political feathers with its planned investment in US telecom equipment manufacturer 3Com and CITIC Securities was putting the finishing touches to a tie-up with investment bank Bear Stearns.
According to a recent survey by information security provider Intralinks, Chinese companies are expected to be Asia’s fiercest M&A exponent in the US and Europe next year. Nearly 60% of the 202 Asia Pacific-based M&A professionals interviewed tipped corporate China to spread its wings beyond the African and South American resources that have so far made up the bulk of investments.
Of recent activities, it is the CITIC Securities-Bear Stearns deal that has rightfully drawn the most attention.
CITIC will buy US$1 billion in securities that will convert into a 6% stake in Bear over 40 years, with an option to extend its holding to 9.9%. In return, Bear will spend US$1 billion on securities that will represent a 2% stake in CITIC over six years and can add 3% more over five years.
The real cherry on top of this is a 50-50 pan-Asian investment banking joint venture. However, at time of writing, it was unclear how this will work in mainland China. According to the Wall Street Journal, the joint venture won’t cover the mainland so Bear and CITIC will collaborate rather than combine here.
For CITIC, having Bear as advisor on overseas-related business would have clear benefits. But this is far less significant than Bear using CITIC to gain exposure to the highly prized yet elusive mainland securities market.
Goldman Sachs and UBS are the only foreign banks with joint ventures through which they can underwrite A-share offerings, and Goldman had to perform corporate gymnastics with the ownership structure in order to satisfy the regulators.
Beijing closed the door after those two sneaked through, but it has since hinted that it is ready to consider joint venture securities companies once again. Therefore, in Bear’s eyes, a partnership with CITIC could mean a head start on the competition.
If all this goes to plan it may be looked back on as a smart bit of business by a bank supposedly floundering in the wake of overexposure to subprime mortgages and with minimal Asia-based services.