CITIC Securities seals deal with CLSA

The marriage between Chinese investment bank CITIC Securities and CLSA Asia-Pacific Markets, a Hong Kong-based equity broker and financial service provider, has been under the spotlight since it took shape in 2010.

Going through all the twists and turns in the past three years, CITIC Securities, which has already completed the purchase of a 19.9-percent stake in CLSA from French retail banking giant Crédit Agricole S.A. for $310.3 million, announced on June 28 that it will postpone its $941.7-million takeover of CLSA's remaining 80.1-percent stake to July 31.

CITIC Securities explained that the parties concerned were going all out to promote the takeover's completion. Once the takeover is wrapped up in late July, CITIC Securities will become the first Chinese-funded financial institution to acquire a widely known overseas counterpart.

In the pipeline

CITIC Securities and Crédit Agricole, CLSA's controlling stakeholder, managed convergence on cooperation in 2010. At that time, the two sides agreed to set up a 50-50 joint venture headquartered in Hong Kong without cash funding. More specifically, CITIC Securities would inject its Hong Kong-based subsidiary CITIC Securities International into the company, while Crédit Agricole would inject CLSA.

Just a few months later, things had changed. In the second cooperation agreement, CITIC Securities decided to have its wholly owned subsidiary, CITIC Securities International, pay a total of $374 million to acquire a 19.9-percent stake in both CLSA and CA Cheuvreux, another subsidiary of Crédit Agricole.

Then CITIC Securities and Crédit Agricole had entered a cooperative relationship, but the plan was not put into practice.

Unexpectedly, the original scheme fell through. On March 29, 2012, CITIC Securities announced it would no longer acquire the equity in CA Cheuvreux, but it would continue to invest in a 19.9-percent stake in CLSA and would enter exclusive negotiations with CLSA as quickly as possible to acquire the remaining 80.1-percent stake. The total transaction value was $1.25 billion.

One question surrounding the takeover is: Why would CITIC Securities pay such a high price for a securities trader that is losing money?

By Dec 31, 2011, CLSA's total assets and net assets had reached $4.4 billion and $561 million, respectively. It gained $61 million in net profits in 2010, but lost $10 million in 2011.

Confronting voices of doubt, Ge Xiaobo, Chief Financial Officer of CITIC Securities, insisted that CLSA was worth the price, and expected the takeover could complement CITIC in its overseas business.

"CITIC's overseas business has never achieved the goal of contributing 20 percent to the total operation revenue. The acquisition of CLSA may help CITIC Securities get closer to the goal," said Ge. In 2011, CLSA registered revenue of $739 billion, which was equivalent to 15 percent of that of CITIC Securities.

Caution with ambitions

Although being a major investment bank in China, CITIC Securities still lags behind international financial giants in research and brokerage. Yin Ke, CEO of CITIC Securities, says CITIC Securities aspires to be the Goldman Sachs of Asia.

CITIC Securities has tried before to expand overseas. As early as October 2007, it signed an all-encompassing strategic cooperation scheme with Bear Stearns Companies Inc. from Wall Street. The Chinese investment bank initially planned to invest about $1 billion in Bear Stearns' convertible trust securities, which accounted for 6 percent of the US investment bank's stakes.

But since then, Bear Stearn's share price has plunged 74 percent. While the agreement was under review by Chinese supervision authorities, the sub-prime crisis broke out and the former fifth largest American investment bank took a substantial hit. Fortunately, CITIC Securities dodged a bullet.

Though its strategic cooperation plan with Bear Stearns was terminated, CITIC Securities said that its strategy hadn't changed and it would continue to see opportunities abroad. While pursuing CLSA, it also completed an H-share listing, paving the way for international business. In October 2011, CITIC Securities went public in Hong Kong at a price of HK$13.3 ($1.72), raising approximately $2 billion.

The purchase of CLSA marks a solid step toward internationalization by CITIC Securities. It would equip CITIC Securities with an overseas research component, something it has longed for. The marriage allows both to share research results and to intensify cooperation in the stock market as well as in merger and acquisition consulting.

Most industrial insiders believe while the acquisition would give CITIC Securities a stronger voice in overseas business, risks still persist. And the biggest challenge CLSA now faces is how to integrate the two and develop synergy.

CLSA's Asia-Pacific business mainly includes brokerage, investment banking and private equity businesses. In its shareholding structure, Crédit Agricole's corporate and investment banking unit owns 65 percent of CLSA, with the broker's staff owning 35 percent.

As everyone in the trade knows, management and a strong core team are most vital for international investment banks. For this reason, after the completion of the CLSA takeover, it is of prime importance to preserve CLSA's talent.

Yin noted that CITIC Securities didn't intend to integrate CLSA into a single platform, and it would retain CLSA's independence and management for a period of time.

"Only by providing customers with differentiated services and holding independent views on the international stage can Chinese investment banks build up their credit overseas and help Chinese listed companies go abroad."