Two days after I posted my piece on how a Chinese acquisition of a foreign bank would destroy market value, China Minsheng Banking Corporation announced that it would spend $96 million to buy a 4.9% share in UCBH, the holding company for California-based United Commercial Bank.United Commercial Bank has $11 billion in assets and 71 branches, mostly in California (one in Hong Kong). Minsheng also announced that it planned to purchase another 5% of the company next year for between $115 and $172 million, and had an option to acquire a further 10% in 2009.
China Minsheng had $112 billion in assets as of June, 2007, and its share price closed today at RMB 16.3 per share, giving it a market cap of around $26 billion.Its share price was up 4.4% on the news of the acquisition, although by day end it gave some back to rise 3.1% net for the day. It has been up 90% year to date, even after a $2.3 billion share sale in March.
So what about my prediction?The first part of my prediction, that the announcement of the purchase of the California bank would cause a surge of nationalist pride that caused share prices to rise, turned out to be true, although with the A-share index up 2.55% today, it probably didn’t need much to see an increase.Nonetheless I would have been surprised at any other reaction – when banks from developing countries make their first US acquisition, the local retail market almost always sees that as a brave and exciting step forward, and share prices always rise.
The question is what happens next.It is inevitably going to be a little complicated, but probably not much. First, UCB is only 10% the size of Minsheng, and Minsheng is only committing to buy 10% of the bank, so this represents an acquisition that will increase assets by only around 1%, and the acquisition price for the full 10% is significantly less than 1% of Minsheng’s market cap, so it is hard to see it as a major acquisition (although if spending less than 1% of the bank’s capital can cause its share price to rise by 3-4%, perhaps they should do a few more small purchases before their next stock deal).
Secondly, and perhaps more importantly, with the A-share market regularly notching up 2-3% days up and down, any revaluation of Minsheng shares is likely to be hidden in the big swings that the share prices is likely to take anyway, especially since the price is driven by retail punters, and not institutional investors. Even if Minsheng’s price drops like a stone in the next few weeks, that is far more likely to reflect market volatility than it is to reflect a change in investors’ perceptions caused by the acquisition.
My conclusion is that this, unfortunately, is not the test case to indicate whether or not the option model makes a good prediction, although in reading about the acquisition I did see that, according to Reuters, “last month, central bank governor Zhou Xiaochuan urged the country's banks to take stakes in overseas institutions”.The option model does suggest that the regulators would love to see more of the same
One problem with the option model is that all of the banks that are thinking about overseas purchases have good balance sheets. One could argue (correctly I think) that these balance sheets have hidden liabilities and aren't really as good as they appear. The trouble then is that its not clear how this works with the option model.
The other issue is that one can argue (correctly) that the banking system is a mess. Minsheng is one of the banks that everyone thinks is in good shape, and so it's not clear again how Minsheng stock relates to the model since Minsheng has high intrinsic value.
The option model might work better for non-financial SOE's. Banks in China are tightly regulated (by Chinese standards) and there is no way that the CBRC is going to let an insolvent bank make purchases without dealing with the insolvency first. However, other industries are much less regulated, and there are a lot of overseas purchases there.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (1) for "Minsheng buys UCB"
- 10/9/2007 6:53 PM
January, 2008