Last year was an interesting year for M&A with $107 billion of issuance. Will this year be better or worse?
I think last year set the floor. The market this year will be either as good or better. I see what the backlog of deals looks like in our own pipeline - the pipeline is there, the question is, will the deals close. I think they will.
I also think M&A, like any other investment activity, is highly correlated to growth rates. And we' re counting on a US recovery in the second half, so that should mean more M&A.
Do you think there is a correlation between M&A activity and the state of equity capital markets? In years where the equity markets are closed - like last year - CEOs are forced into M&A as the only way to raise money. When equity markets are strong they don't sell non-core assets, but simply raise new equity.
In some situations that's true.. But in some other situations it's complementary, because with more publicly listed companies, you have more currencies to trade. So you can do more deals.
Very often in these markets you don't have the option of stock or cash, you just need cash. And when cash is short there is no trade. But to the extent you can get more ECM activity and create more currency, you actually encourage M&A activity.
Last year Singapore was the hottest M&A market. Will it be in 2002?
Singapore companies will continue to be active. Their domestic market isn't big enough, they have to look offshore, they've got the muscle, and expertise.
But other countries will be more active. The countries that are capable of putting those types of numbers on the board are China, Hong Kong, Korea, and Taiwan. It will tend to be North Asia, because that's where the companies are large enough to do something like this.
Do you think there is going to be a lot of bank consolidation in places like Korea and Taiwan?
Yes. You ran something in FinanceAsia about six months ago saying "The family bank is dead". I wouldn't be as dramatic to repeat that, but you do see a lot of those forces coming to the fore. If you look at banks now, they have capital constraints, and I think the private banks have got, relatively speaking, smaller over the course of the 1990s versus the economies they serve. Most of them just aren't big enough, and that forces consolidation.
And put yourselves in the shoes of families that own banks. In some cases, you have to ask, if you're a family why would you want to own a bank, especially a small one? One, it may be prestigious. Two, you might have other businesses and owning a bank may give easier access to capital. But the whole trend towards corporate governance and more transparency is making it very difficult for family owners to use banks to fund their other businesses. That's a trend that has happened in the last 10 years. So, all of a sudden, you have to run a bank in a highly professional way, and while margins may not be that great, NPLs might kill you. It's no longer as glamorous to run a small or mid-sized bank.
Observers say Hong Kong still needs a lot of consolidation.
I think it could use some consolidation, especially when you see that the real market is North, in China, and to compete in China you've got to have some heft. The Hong Kong market by itself is limited to the small population, it's very sophisticated and margins are razor thin. Hong Kong banks have to push North and you need heft for that.
Do you think this will be the year when we see real consolidation in Taiwan's banking sector?
I think this could be it. We saw the start of it last year, with Cathay Life. That sort of momentum will build on itself.
Do you think your telecoms group will have a better M&A year than your FIG group?
Hard to say right now. Both teams are very strong, although right now, the market knows our FIG team better. But the telecoms team we've put in place should be second to none.
In Asia there seems to be one dominant theme each year. Do you think consolidation among Hong Kong mobile operators could be this year's?
That's been talked about. The question is: will it happen? The pressures are there. Even if it did, will it be the overriding theme in the market?. The question is very good, because right now the market is searching for overriding themes. And one clear theme hasn't emerged yet, other than the traditional "more room for consolidation"
Do you think there is any potential for consolidation among Asian airlines?
Yes, there is. Many Asian airlines are government-owned so the issue is landing rights. Very often these are given to governments and their flag carriers. But even still, sure there are room for deals. And in a year like this where the airline industry has taken a few bodyblows,people will be looking. Even flag carriers now have to make a profit and so there are a lot more managers now thinking out the box.
Do you think fee-cutting will continue among investment banks?
While there may have been some fee-cutting in the market last year, it wasn' as pronounced at the top end of the market as in the middle part. The market leaders, ourselves included, could afford to keep their fees. The second tier players had to be more imaginative.
Do you think your ability to use your balance sheet worries the so-called pure investment banks in Asia?
I' sure it does. Relative to where we or Citi Salomon are, their product offering is looking pretty narrow. If there' one thing this downturn has taught us is "broader is better". As long as you don't dilute quality and expertise. We've proven ourselves to be very strong in the key product areas of investment banking so there's been a strengthening rather than a dilution of product expertise.
Obviously one of the most exciting M&A deals you did last year was the Emerson Huawei deal. Has this helped the leadership in China to crystallize what a takeover code should look like?
I think so. In fact, I think it has done three things. Number one, the fact that the deal even got done shows the Chinese are willing to accept the idea of international companies coming in and doing a full takeover. Second, it gives an example of how deals like this can get done. Maybe some of the practices will be codified. It also helps Chinese entities look outside. If people can buy assets in China, then why shouldn't Chinese companies be buying assets abroad.
Are takeover codes an important piece of the capitalist infrastructure in Asia?
Yes. A takeover code speaks of corporate governance, and it's more important than ever when a lot of your companies are publicly held.
China has looked at global best practices in the last few years. What would these be for takeover codes?
I wouldn't begin to suggest to the Chinese authorities what their takeover code should look like. But I would encourage them to do more of the same, which is to look far and wide. What the Chinese have proven themselves to be very adept at, is taking the best from anywhere and adapting it to their own situation, fully understanding that even the creation of takeover codes can be transformational. They may not need the Rolls-Royce of takeover codes on day one, however, because it may not be applicable to where the market is. You want a takeover code that's applicable on day one, and as your economy grows and becomes more sophisticated then you add bells and whistles.
Takeover codes point to an underlying philosophy of either protecting companies and creating national champions or pure capitalism, where a company can takeover another pretty easily. I suppose that will be the debate in China. Which model?
It's a question of which and when. You might start with one model and transform over time when you're good and ready. There might be an economic cycle where you do need economic champions.
Do you think Asia will move towards having antitrust bodies?
Eventually, but the question then becomes how do you define the market? If a company defines their market as all of Asia, will the country it comes from prevent them from getting to the size and heft to be a pan-Asian player? This will make for an interesting discussion.
