By Henny Sender
Wednesday, April 30, 2008
http://www.ftchinese.com/sc/story_english.jsp?id=001019041&loc=story
When CICC, the Chinese investment bank part-owned by Morgan Stanley of the US, held its quarterly board meeting in the opulent Sukhothai Hotel in Bangkok in January, the mood was far from collegial.
Morgan Stanley, reeling from more than $9bn (£4.5bn, €5.8bn) in write-offs related to America's subprime loans fiasco, was determined to sell its 34 per cent stake. Only when it rid itself of CICC would Beijing regulators allow it to undertake further initiatives in China and, besides, it needed all the cash it could get. At the same time, the Chinese management of CICC – headed by Levin Zhu, son of Zhu Rongji, the former prime minister – was determined to cut the best deal before severing the connection.
Since its inception in 1995, announced in the elegant Diaoyutai state guesthouse in Beijing, “CICC has been a microcosm of China itself,” says Fraser Howie, a former CICC employee who is now an analyst for CLSA, the regional stockbrokerage. “It is a lens through which to view the country” – a country where it is seldom possible to separate the commercial from the political.
As China moves away from the era when the Communist party controlled everything, the wrangle over the company reflects the endurance of old Chinese values – such as the critical importance of official connections – even as it shows a capitalist face where high finance has been adopted with such dexterity that its practices are sometimes used against international partners. Connections from Mr Zhu and others helped make CICC powerful and those connections are now helping to stymie Morgan Stanley.
When CICC was formed, the Wall Street bank's leaders were exultant. CICC had a virtual monopoly on bringing Chinese companies to local stock markets, giving Morgan Stanley a boost over other foreign competitors. The Chinese side – China Construction Bank, then under Wang Qishan, who today is the powerful vice-premier in charge of financial services – was equally exultant, as CCB had scored a similar coup over its banking rivals. Other partners in the venture included the Government of Singapore Investment Corp and Payson Cha, a Hong Kong property tycoon.
Mr Zhu joined CICC in 1998, brought in by Mr Wang, and for years maintained a low profile. But while in its early days Morgan Stanley provided the joint venture's top executives, an informal line of control developed that bypassed them and led straight to Mr Zhu. By the time the January board meeting came round, top management of CICC was all but entirely in Chinese hands. Over time, the Chinese management had built up a stake of about 20 per cent.
They were well compensated: how much of that 20 per cent is owned by Mr Zhu is not clear but he is understood last year to have made $17m, up from $10m the year before. By comparison, senior government officials in China earn as little as $10,000 year. Wang Dongming, chairman of Citic Securities, a prominent local stockbroker, receives well under $1m.
At the board meeting in Bangkok, capitalising on Morgan Stanley's wish to exit the venture, management of CICC demanded more shares to increase its stake. While Mr Zhu kept quiet, Susan Li, a director, presented an equity incentive plan, according to several participants. Failure by the board to endorse the plan would lead to a wave of senior defections, she warned.
Her presentation was followed by an impassioned plea from Ding Wei, the head of CICC's investment banking division, noting that CICC was built from the blood and sweat of management. As for the owners, “what have they done for CICC?” Mr Ding asked pointedly, these people say. Mr Cha, the Hong Kong shareholder, was enraged.
Management's demands did not bode well for Morgan Stanley's efforts to shed CICC. The investment bank had been in talks with a number of US private equity firms interested in taking over its stake, including Bain Capital, Carlyle, CV Starr, JC Flowers and TPG. The potential buyers were already concerned that “CICC was a good company but there was a bit of a bubble”, according to the head of one private equity house that looked at CICC. The stock market had soared but was beginning a descent and none of the buy-out groups wanted to pay peak prices. Now there was the added concern that any purchaser would face immediate dilution.
Mr Zhu and the management team at CICC were also voicing their demands to potential buyers, though more obliquely. In talks with one, Mr Zhu enunciated his understanding that in most brokerages, half the shares are owned by management and 50 per cent of revenue also goes in compensation. “He said, this is how the industry works normally and in light of that, let's talk about a reasonable package because 20 per cent is too low,” this second potential buyer recalls.
When the buyer's group met management as part of its due diligence, managers spent more than an hour of the scheduled four hours expressing their demand for more ownership, this person adds.
In addition to their demand for more equity, CICC top executives also said they would like to merge with at least one more local brokerage firm and suggested that going public any time soon would be a problem. “They wanted to do another deal so compensation as a percentage of revenue would be lower,” the second potential buyer says.
Learning that management was reluctant to list led one early bidder to drop out of the auction. Private equity firms rarely make investments without a clear exit plan and the most obvious would be to take CICC public.
Morgan Stanley's hopes of raising $1bn for its stake appeared to be dashed. Management led by Mr Zhu had considerable leverage, not least because Morgan Stanley could not undertake new initiatives in China until it shed the holding. In addition, it was Mr Zhu's connections that made the company so valuable.
“It is a one-trick pony,” the partner looking at CICC on behalf of the second private equity firm says. That one trick consists of listing state enterprises. To win the mandate for these, the most important requirement is to have relationships with key government and party officials – something that Mr Zhu has in abundance. “When he meets provincial governors, he is meeting officials who worked for his father,” says one former CICC staffer. He has monetised his father's career.”
Yet Mr Zhu has undeniably built a business and made money for his shareholders, including Morgan Stanley. Morgan Stanley has already made a healthy return on its $35m initial investment, at least tripling its money. He not only wins mandates but knows how to execute them. He has become expert at the complicated carve-outs that hack profitable companies out of the carcasses of state-owned enterprises.
“He works the system,” says the former staffer of Mr Zhu. “If the situation is unfair, it is the unfairness of the system.”
Wednesday, April 30, 2008
http://www.ftchinese.com/sc/story_english.jsp?id=001019041&loc=story
When CICC, the Chinese investment bank part-owned by Morgan Stanley of the US, held its quarterly board meeting in the opulent Sukhothai Hotel in Bangkok in January, the mood was far from collegial.
Morgan Stanley, reeling from more than $9bn (£4.5bn, €5.8bn) in write-offs related to America's subprime loans fiasco, was determined to sell its 34 per cent stake. Only when it rid itself of CICC would Beijing regulators allow it to undertake further initiatives in China and, besides, it needed all the cash it could get. At the same time, the Chinese management of CICC – headed by Levin Zhu, son of Zhu Rongji, the former prime minister – was determined to cut the best deal before severing the connection.
Since its inception in 1995, announced in the elegant Diaoyutai state guesthouse in Beijing, “CICC has been a microcosm of China itself,” says Fraser Howie, a former CICC employee who is now an analyst for CLSA, the regional stockbrokerage. “It is a lens through which to view the country” – a country where it is seldom possible to separate the commercial from the political.
As China moves away from the era when the Communist party controlled everything, the wrangle over the company reflects the endurance of old Chinese values – such as the critical importance of official connections – even as it shows a capitalist face where high finance has been adopted with such dexterity that its practices are sometimes used against international partners. Connections from Mr Zhu and others helped make CICC powerful and those connections are now helping to stymie Morgan Stanley.
When CICC was formed, the Wall Street bank's leaders were exultant. CICC had a virtual monopoly on bringing Chinese companies to local stock markets, giving Morgan Stanley a boost over other foreign competitors. The Chinese side – China Construction Bank, then under Wang Qishan, who today is the powerful vice-premier in charge of financial services – was equally exultant, as CCB had scored a similar coup over its banking rivals. Other partners in the venture included the Government of Singapore Investment Corp and Payson Cha, a Hong Kong property tycoon.
Mr Zhu joined CICC in 1998, brought in by Mr Wang, and for years maintained a low profile. But while in its early days Morgan Stanley provided the joint venture's top executives, an informal line of control developed that bypassed them and led straight to Mr Zhu. By the time the January board meeting came round, top management of CICC was all but entirely in Chinese hands. Over time, the Chinese management had built up a stake of about 20 per cent.
They were well compensated: how much of that 20 per cent is owned by Mr Zhu is not clear but he is understood last year to have made $17m, up from $10m the year before. By comparison, senior government officials in China earn as little as $10,000 year. Wang Dongming, chairman of Citic Securities, a prominent local stockbroker, receives well under $1m.
At the board meeting in Bangkok, capitalising on Morgan Stanley's wish to exit the venture, management of CICC demanded more shares to increase its stake. While Mr Zhu kept quiet, Susan Li, a director, presented an equity incentive plan, according to several participants. Failure by the board to endorse the plan would lead to a wave of senior defections, she warned.
Her presentation was followed by an impassioned plea from Ding Wei, the head of CICC's investment banking division, noting that CICC was built from the blood and sweat of management. As for the owners, “what have they done for CICC?” Mr Ding asked pointedly, these people say. Mr Cha, the Hong Kong shareholder, was enraged.
Management's demands did not bode well for Morgan Stanley's efforts to shed CICC. The investment bank had been in talks with a number of US private equity firms interested in taking over its stake, including Bain Capital, Carlyle, CV Starr, JC Flowers and TPG. The potential buyers were already concerned that “CICC was a good company but there was a bit of a bubble”, according to the head of one private equity house that looked at CICC. The stock market had soared but was beginning a descent and none of the buy-out groups wanted to pay peak prices. Now there was the added concern that any purchaser would face immediate dilution.
Mr Zhu and the management team at CICC were also voicing their demands to potential buyers, though more obliquely. In talks with one, Mr Zhu enunciated his understanding that in most brokerages, half the shares are owned by management and 50 per cent of revenue also goes in compensation. “He said, this is how the industry works normally and in light of that, let's talk about a reasonable package because 20 per cent is too low,” this second potential buyer recalls.
When the buyer's group met management as part of its due diligence, managers spent more than an hour of the scheduled four hours expressing their demand for more ownership, this person adds.
In addition to their demand for more equity, CICC top executives also said they would like to merge with at least one more local brokerage firm and suggested that going public any time soon would be a problem. “They wanted to do another deal so compensation as a percentage of revenue would be lower,” the second potential buyer says.
Learning that management was reluctant to list led one early bidder to drop out of the auction. Private equity firms rarely make investments without a clear exit plan and the most obvious would be to take CICC public.
Morgan Stanley's hopes of raising $1bn for its stake appeared to be dashed. Management led by Mr Zhu had considerable leverage, not least because Morgan Stanley could not undertake new initiatives in China until it shed the holding. In addition, it was Mr Zhu's connections that made the company so valuable.
“It is a one-trick pony,” the partner looking at CICC on behalf of the second private equity firm says. That one trick consists of listing state enterprises. To win the mandate for these, the most important requirement is to have relationships with key government and party officials – something that Mr Zhu has in abundance. “When he meets provincial governors, he is meeting officials who worked for his father,” says one former CICC staffer. He has monetised his father's career.”
Yet Mr Zhu has undeniably built a business and made money for his shareholders, including Morgan Stanley. Morgan Stanley has already made a healthy return on its $35m initial investment, at least tripling its money. He not only wins mandates but knows how to execute them. He has become expert at the complicated carve-outs that hack profitable companies out of the carcasses of state-owned enterprises.
“He works the system,” says the former staffer of Mr Zhu. “If the situation is unfair, it is the unfairness of the system.”
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