Should Industrial and Commercial Bank of China (ICBC) live up to expectations and raise a world-record US$19 billion in its October initial public offering, those underwriting the deal will be able to congratulate themselves on a job well done.
Not only will they have pushed ICBC past Japan's NTT DoCoMo to become the largest IPO ever seen, but they will have done it off the back of a breakthrough Hong Kong-mainland simultaneous listing.
They can also expect a payoff sufficient to make the battle to get the underwriting mandates seem thoroughly worthwhile.
As backers of the US$12 billion-plus Hong Kong slice of the offering, Merrill Lynch, Credit Suisse, Deutsche Bank, China International Capital Corp (CICC) and ICEA Finance Holdings can look forward to sharing around US$350 million in fees.
"If you look at the really big deals, we are talking multibillion dollar listings and when you are making 2.5%-plus of that, it's a fairly big pot" said Michael Fosh, partner and Beijing chief representative for Herbert Smith, who has advised on a number of China IPOs.
"The higher the profile and the better quality the listing, the more the banks will fall over themselves to get it."
Chinese companies raised US$22.2 billion from IPOs in 2005, up from US$12.9 billion the year before, according to Thomson Financial. With US$16.9 billion for the year to the start of September, Gokul Laroia, Morgan Stanley's head of global capital markets for Asia, expects the final figure for 2006 to be US$35-40 billion.
"We expect the volume of Chinese IPO's will grow to a meaningful part of the global IPO market," he said. "I can't foresee a situation where this could change."
However, the IPO landscape is changing as fast as the companies are coming to market. While the headline figures are likely to remain consistently strong, the size and nature of the listings will differ. In recent years the market has been driven by a number of large-scale IPOs by state-owned enterprises (SOEs).
There has been a recognizable order to these listings. First it was telecoms with China Mobile and China Unicom; next the oil firms PetroChina, Sinopec and CNOOC; and then financial institutions. Insurers PICC Property and Casualty, China Life and Ping An have been followed by Bank of Communications (BOCOM), China Construction Bank (CCB) and Bank of China (BOC).
From China Mobile's US$4.2 billion to BOC's US$11.2 billion, the deals have become ever larger in size. No one expects ICBC's projected US$19 billion to be topped in China any time soon and this has left investors asking what comes next.
"The financial services sector does not signal the end," said Ian Carton, head of Asia capital markets and financing at Merrill Lynch. "There is a significant amount of infrastructure-related privatization to come. And then the biggest change in the last few years has been the emergence of a credible private sector."
While a cluster of fast-moving Chinese tech companies – renewable energy and medical are tipped for particularly strong growth – debut on NASDAQ, state assets such as railways, ports, utilities and an array of ancillary companies producing things like petrochemicals are likely to join the smaller banks on the road to the market in Hong Kong and the mainland.
State Grid Corp, which controls power distribution networks in several eastern provinces, is expected to raise US$5 billion. China Communications Construction Group (CCCG), which manufactures two-thirds of the world's port cranes, is set for a US$2 billion offering.
One of the reasons for the huge disparity with ICBC is it is very hard for most SOEs, which have quite disparate assets, to emulate the banks and package the whole lot into an IPO. For example, only PetroChina's exploration and production assets are listed, which represents just 40% of the entire company.
"Most of the time the transaction does not involve listing the entire SOE; you are taking the jewel in the crown, something the international markets can identify with," said Dominic Tsun, a partner in Skadden Arps Slate Meagher & Flom's Hong Kong office, who advised on the Hong Kong IPOs of BOCOM and PetroChina.
"I am still reasonably confident that there is going to be a pipeline of US$1 billion IPOs. But there is not going to be one of these US$10 billion deals every year or every two to three years."
For the investment banks competing to underwrite Chinese IPOs, chasing a larger number of relatively small deals across a wide range of sectors poses obvious challenges. Investment banking units are sending ever more people to China – Goldman Sachs is said to lead the way with more than 100 representatives on the ground.
But these changes are taking place in parallel to an evolution in Chinese companies' understanding of the capital markets. This is thought to have raised the bar in terms of bidding for mandates.
"The environment is changing because investment banks need to add value today," said one Chinese dealmaker, who asked to remain anonymous.
"Ten years ago state-owned brokerages used to give under-the-table money. Now that the industry is dominated by private companies, they have to add value."
Merrill Lynch's Carton agrees that firms are now more market-savvy, pointing to the growing list of successful case studies that companies looking to list can follow. "Increasingly, any local company wanting to access the international capital markets analyses their situation objectively and looks for the best skill set.
"They want the best banks in the world to do their financing."
This offers a sharp contrast to China Eastern Airlines' 1997 US$280 million IPO. Bruce Richardson, managing director of research at Xinhua Finance, recalls that Morgan Stanley spent three years nurturing the company towards a listing only for ABN-AMRO to play the local card and get cut in on the deal at the last minute.
"The corporate finance lady from ABN-AMRO phoned up and started talking in Shanghainese and was allowed to do 10% of the offering," Richardson said.
What started as a bid presentation followed by a banquet-and-karaoke-type affair has since become what is described as "heavy-duty corporate entertainment" combined with ever more painstaking groundwork. The increasingly imaginative plans employed by investment banks to win mandates are well documented.
JP Morgan is said to have turned to Henry Kissinger for assistance in securing a mandate from CCB while Deutsche Bank came to the bidding equipped with a letter of support from then German chancellor Gerhard Schroeder to Chinese Premier Wen Jiabao. ICBC chairman Jiang Jianqing's daughter worked as a summer intern at Goldman Sachs in New York in the months running up to Goldman's bid to underwrite the Chinese bank's IPO.
None of these ploys was successful although Goldman is said to have been unlucky. It succeeded in wooing ICBC only for the State Council to veto the agreement, concerned that allowing one party to underwrite two of the state bank IPOs (Goldman also worked on BOC's listing) would send out the wrong message.
But employing relatives of influential people served other banks very well. "That way the listing company cannot refuse the phone call," said Richardson. "It gets you a meeting."
What it does not get you is a mandate. The general consensus is that, with Chinese companies coming to the table with an ever clearer idea of what they want, heavyweight personnel have to be backed by heavyweight ideas.
"A bulge bracket brand name means that most doors can be opened, but opening the door does not win you a mandate," said Merrill Lynch's Carton.
"You have to market the depth and breadth of the services you can provide and advertise the successes the firm has been a part of in the past. Whereas access may be provided by local bankers, the whole firm's financial expertise is what counts."
Nevertheless, as Skadden's Tsun points out, "it's still a business about trust and confidence" and listing companies want to work with people who can match words with deeds. This explains the tug-of-war that occurs between the banks over Chinese operators who have strong track records for getting deals off the ground.
Just in the first few months of 2006, Morgan Stanley's China chief executive Jonathan Zhu was poached by private equity firm Bain, prompting the bank to recruit Wei Christianson, Citigroup's head of investment banking. This exchange motivated a further couple of transfers between the two investment banking units.
Chinese firms may be becoming more familiar with the listing process and what they can get out of it, but reputations and personalities – and, in a few cases, regulatory intervention – retain the ability to swing a decision.
Success comes down to making company executives feel good about the deal.
"Ten years ago when I began this career, I had to drink too much," said a Chinese dealmaker who asked not to be named. "Now everything is changing and I have to use my mind. But if a client comes to Shanghai I should know where there is a good massage place."
Cornerstone club: feeding the fat cats
As Industrial and Commercial Bank of China (ICBC) prepares to list it will go through what has become a rite of passage for big firms hoping to hit rich in Hong Kong: deciding how to divvy up shares among the corporate investors.
The corporate – or cornerstone – investors do not fall into the strategic investor category. Royal Bank of Scotland's US$3 billion pre-IPO investment in Bank of China (BOC) was tied to promises of support in developing the Chinese lender's operations. The 12 corporate investors who spent US$2.25 billion on BOC shares under a 12-month lockdown were there principally to sprinkle the deal with stardust.
"They have become talismanic for other investors," said Dominic Tsun, a partner in Skadden Arps Slate Meagher & Flom's Hong Kong office.
"If they are willing to put their money into a deal then people think it must have some quality. This affects the pricing."
The roll call of investors includes some of Hong Kong's top tycoons – most of whom first hit rich through the territory's property market – who buy in using personal funds or companies they control.
Li Ka-shing, chairman of Cheung Kong Holdings and the richest man in Asia, Cheng Yu-tung of New World Development, Henderson Land Development's Lee Shau Kee, owners of Sung Hung Kai property group the Kwok family and Robert Kuok of the Kerry Group are all active pre-IPO investors.
Their names, and others, are linked to share offerings of all sizes. It's likely they will all be early investors in ICBC.
The tycoons' participation dates back to the 1997 China Mobile IPO in Hong Kong and New York. Targeting US$4 billion, it was set to be both Hong Kong's largest ever listing and the world's biggest IPO by a Chinese firm. When there were concerns that demand would be insufficient, Li, Lee, Kuok and the Kwoks were among those who came in and took 44.6% of the offering, giving the deal the momentum it needed.
"It was more an idea that this was an assured allocation," said Tsun. "It was clearly a very large transaction so it was quite different from what had gone before."
With Hong Kong – and Chinese companies – now able to attract sufficient international investment that offerings are many times oversubscribed and dual listings overseas are unnecessary, opinion is divided as to why corporate investors are still getting a cut of the deals.
"They are being paid back for past services," said Bruce Richardson, managing director of research at Xinhua Finance. "They came in and helped out when Beijing needed support during the handover [of Hong Kong]."
"Is there a political element? In some instances, yes," said Michael Fosh, partner and Beijing chief representative for Herbert Smith. "But this is a relatively straightforward way of selling off quite a significant chunk of the IPO in advance and these are very large issues."
While the investors invariably come out of these deals better off, they do go in with a considerable element of risk: in advance of the opening price being set and the likely market conditions being known. And then their capital is tied up for a set period of time.
"There will always be some people who say that the fact you get into a deal is a good thing," said Tsun.
"But it all depends on how the deal works out – and does it work out better because these people are involved? You have someone who has put their money where their mouth is. If enough people believe in that then there is value in the policy."