BEST M&A DEAL
OCBC's HK$38.7bn ($5bn) acquisition of Wing Hang Bank
Advisers to target: Citi, Goldman Sachs, KPMG, Nomura, UBS
Advisers to acquirer: Bank of America Merrill Lynch, JP Morgan
When Singapore's OCBC finally sealed a deal to acquire Hong Kong-listed Wing Hang Bank at the end of July 2014, it brought to an end a complex process that had seen pretty much the full spectrum of M&A excitement — multiple potential bidders and high interloper risk, an activist shareholder looking to spoil the party, an alphabet soup of regulators and a whopping financing.
The story began the previous year, when Wing Hang Bank substantial shareholders the Fung family and BNY Mellon confirmed that they were speaking to potential bidders for their stakes, which totalled about 45%. Nomura had drummed up a number of parties willing to talk and had introduced them to Wing Hang, but as time progressed Goldman Sachs was brought in to help marshal the potential bidders and to investigate further interest.
On the buyside, meanwhile, Bank of America Merrill Lynch was keen for OCBC to secure exclusive talks to remove those distractions. To achieve that, it meant careful advice on how best to present the rationale for the deal, a crucial part of the case given the sensitivity of cross-border financial M&A.
OCBC saw in Wing Hang an opportunity to secure a better foothold in areas like the Pearl River Delta, where the Hong Kong bank was strong. And the Singaporean bank was likely to be looked up on favourably by regulators and shareholders, given its strength. That mattered, since the China Banking Regulatory Commission, the Hong Kong Monetary Authority and the Monetary Authority of Singapore all had to give their blessing.
An agreement for exclusive negotiations was duly struck at the end of the year, marking the overcoming of the first big hurdle.
Then came the offer, at HK$125 per share, for a total consideration of HK$38.7bn ($5bn). The price to book of 1.77x was below comparable deals, such as China Merchants Bank's acquisition of Wing Lung in 2008 (2.9x). Factoring in accounting differences, Wing Hang came level to Yuexiu's acquisition of Chong Hing Bank in late 2013, at about 2x — but the Wing Hang deal was more than twice the size.
Execution was far from simple, given the fact that the substantial shareholders could only deliver their 45% of the bank, below the 50% level needed for the deal to become unconditional, and also that under Hong Kong law the 90% compulsory acquisition trigger excludes any shares bought ahead of the offer being launched.
OCBC's advisers therefore devised a structure whereby they would secure irrevocable undertakings from the major shareholders and others they approached in the market ahead of the offer, enabling OCBC to get closer to the 50% level but while also allowing those shares to count towards the higher level. When the offer was announced on April 1, OCBC had undertakings over 48.16%, all of which would count towards the 90%.
By June 27 all regulator approvals had been received, and two days later a composite offer document was sent to shareholders. But now the advisers were called upon again, when on July 2 Elliot Asset Management disclosed that it had accumulated a 7.8% stake. This was where judgement was crucial. Issuing a no-increase statement would take away flexibility, but could also force Elliot's hand.
On July 15 OCBC said the offer would not be increased. On July 29 the offer closed with the bank holding 97.52%.
Financing was a $5bn acquisition bridge, although OCBC also subsequently completed two $1bn Basel 3 tier two dollar bonds as well as a $2.7bn rights issue.
The acquisition was impressive enough in isolation to be a worthy winner of this award. But it also sparkled in a historic context. It was the largest FIG M&A deal in Hong Kong since 2001 and the largest Singapore cross-border bank acquisition since the same year. And it was OCBC's largest ever acquisition.
BEST M&A HOUSE & BEST INVESTMENT BANK
Goldman Sachs
Consistently reliable may not be the most jaw-dropping claim ever to have been made by a senior banker, but it is how those running the Asia business of Goldman Sachs like to describe the firm. And with good reason. Its performance in the 12 months to mid November 2014 showed once again how its focus on the best quality mandates ensured that it remained the investment banking franchise that rivals aspire to match.
Equity capital markets and M&A remain the powerhouses within Goldman, and the firm wins our Best House awards for both these categories (see here for the Best Equity House article). It ranked top in ECM for the awards period, and its continued strength in that business in Asia is not just down to its long pedigree in equity deals around the world but also to its scrupulous approach to risk management.
That approach — where ECM works more closely with the securities division than at many rivals — ensures the best judgement on whether a trade is advisable. But it also gives the firm a better read of the market appetite at any one time than others. That's not necessarily illustrated by its top-notch deal roster in IPOs, which during the awards period included Alibaba (our pick for Best IPO) and China Cinda Asset Management, but is more evident in the market intelligence it brings to nimbler deals like the $759m H-share private placement for COSL in January.
In debt capital markets, the firm is by no means churning the out the volume of deals that will give it a top league table ranking, and it finished the awards period in seventh place for G3 bonds. But in typical fashion, it has notched up a remarkable collection of landmark deals in multiple jurisdictions and its breadth is startling for a firm whose debt franchise was fairly deficient in the region just a few years ago.
Strategically, it does not look to dominate deal flow in DCM. It is not resourced to do so, and nor does it think it will make an attractive return if it attempts it. But having spent the last few years building up the bond business, those running it argue that they are now able to take a more selective approach to it.
That selective approach frequently revolves around ensuring it is on any activity for the firm's core clients. It was a JGC on a $5bn deal for China's Sinopec this year, marking the 14th successive capital markets financing that Goldman has worked on for the company. Its joint bookrunner role on a $4bn trade for CNOOC meant that it has led five out of the six offshore bonds the group has done since 2011. And it was one of only two banks to be on both tranches of Hutchison Whampoa's dollar and euro bond in October, the winner of our Best Investment Grade Corporate Bond award.
Problem-solving
In M&A, Goldman remains pre-eminent in the small band of top advisers. In the awards period of the 12 months to mid November 2014, Goldman ranked top for announced transactions and second for completed. In announced, it notched up $71bn of credit from 53 deals, according to Dealogic, just above the $68bn of credit it gained from 55 completed transactions.
The importance of its franchise — and the need to place more focus than ever on a regular strategic dialogue with the top clients in the region — has been reflected in a bolstering of its ranks this year. Asia M&A head Richard Campbell-Breeden stepped up to become chairman, to spend more time nurturing the firm's most important relationships, and Goldman's South Korea country head, John Kim, relocated to Hong Kong to run M&A in his place. Another banker, Christos Tomaras, was also moved from London to join the Asia team.
As in previous years, Goldman's M&A business has shown remarkable diversity and a relevance to the key themes driving corporate activity in the region. One of Goldman's strengths has always been its ability to accompany global clients into strategic situations in Asia, and its deal roster for 2014 is no exception. Whether advising KKR on its $1.2bn acquisition of Goodpack or Axa on its $625m purchase of half of Chinese insurer Tian Ping, the combination of client relationships and strong expertise in the target region was telling.
But the firm is equally able to capture the increasingly important intra-regional deals as well as moves by Asian corporates abroad. Although the firm reckoned the HK$38.7bn ($5bn) acquisition of Hong Kong's Wing Hang Bank by Singapore's OCBC was the most impressive deal it worked on (and is our choice of Best M&A Deal — see above), as a pure intellectual challenge its bankers relished more the work they did for Lenovo on its $2.1bn acquisition of IBM's x86 server business. That deal, where Goldman was advising the Chinese PC maker alongside Credit Suisse, with Bank of America Merrill Lynch advising IBM, demanded an intense structuring effort to create the conditions necessary for the transaction to happen.
Working on challenging situations like Lenovo's deal — where even the timing of much of the work, over the Christmas period, was a challenge — is a hallmark of Goldman's franchise. It is a testament to the trust in the quality of advice that clients expect that the bank is frequently brought into situations where a firm hand is needed. That was true of the OCBC/Wing Hang deal, where Goldman was brought in by the target to manage the situation as potential bidders circled.
We judged Goldman's business to be the best this year, but it faces formidable competition from a handful of other M&A advisers in the region. Citi is increasingly leveraging its relationships throughout the firm — and its balance sheet muscle — to secure credit on a greater variety of M&A business than before, and is undoubtedly now a top player.
Morgan Stanley, perhaps the closest to Goldman's model, remains a strong force. And Bank of America Merrill Lynch has also had a tremendous year, firmly establishing itself in the top echelons, its regional strategy increasingly seeing the benefits of the firm's global effort to bank its top clients in every way.
Shifting sands
Not just in M&A, but in investment banking more broadly, there is increasingly no one business model that trumps all others in the region. What were once a legion of small start-up firms are developing fast — Alibaba's crowning IPO achievement this year is a reminder of how fast and how far such companies can grow.
Goldman in Asia makes no secret of the fact that it wants to work for the very best clients for the very best fees. Its bankers freely concede that its continued success will therefore depend not only on servicing those top clients well and repeatedly, but also on identifying the leading businesses of the future.
But it also depends on those rising firms giving it their business. Many, as they begin to mature and become acquisitive or expansionary, may increasingly prefer to turn to those banks that have supported them with financing or banking services throughout their development and which are now, in many cases, able to provide them with top notch advice alongside the lending or distribution power. There will be others, conversely, who will look to broaden the strategic advice they receive and seek idea generation away from their lenders as they graduate to a higher plane.
The balance of those two dynamics will determine the longer term competitive position of a firm like Goldman in Asia. It's for that reason that one of Goldman's most senior bankers in the region argues that the key questions for the franchise are: "Do we stay nimble? Are we an incumbent or a challenger?"
There will always be a place for Goldman's prestigious brand among the leading businesses in the region. But whether it will be dominant in even one year's time is anyone's guess. The commercial banks are rising. In the long term, they may suit Asia's clients more.