When the Carlyle consortium initially bought its controlling 40.5% stake in Koram Bank in October 2000, it had been codenamed 'Project Goldfinger', after the James Bond movie.
Carlyle's Asian boss, Michael Kim had confessed that they named all of their projects after James Bond movies. So which Bond codename was used for the $2.7 billion sale of Koram to Citigroup?
"Actually, we ran out of James Bond film titles to use," says Kim, who was caricatured as a Korean-version of Sean Connery on our December 2000 cover.
This time, as we discuss the recent transaction the blockbuster movie, Troy enters the conversation. Should Troy have been the codename we ask?
"Well, this whole thing has been pretty epic," observes Kim. That is no understatement.
Carlyle's and his own involvement with Koram began in November 1999 and officially ended with Citi's entry in May - four years and seven months later. Not quite as long as the Trojan Wars - which lasted 10 years - but a substantial slog. Moreover, Koram could be Citi's very own Trojan Horse.
As everyone knows, the Trojan Horse secured victory for the Greeks by getting inside Troy's legendary high walls. And from the perspective of the major Korean banks, the sale of Koram to Citigroup amounts to a sort of Trojan Horse strategy too. The high walls of Korean banking have been breached by the world's biggest and most powerful financial services firm. Through Koram, Citi will become Korea's fifth biggest bank. Indeed though foreign private equity firms bought stakes in Korean banks, this is decidedly not the same thing as Citi entering the fray with its balance sheet, its risk management skills and a range of products that encompass consumer and corporate banking, asset management and insurance.
The large Korean banks are right to be worried. Citigroup will be the catalyst that sparks a revolution in Korean banking - and thanks to Koram, it will do so from within the heart of the system. The only difference is that unlike the Trojan Horse which saw Troy razed, Citi's Koram Horse will lead to a general upgrading of the Korean banking sector through healthy competition. This is precisely why deputy prime minister and finance minister, Lee Hun-Jai has publicly welcomed Citi's acquisition.
Little wonder, then, that Kim feels the whole transaction has an epic quality.
The birth of Helen
Every epic has its beginning and this one naturally begins with the birth. Koram was founded in 1983 as the 'Korean-American Bank' - a joint venture between top local chaebols such as Samsung and Daewoo and Bank of America. By the time of the Asian financial crisis it had grown into an important bank with a reputation for sounder lending policies than the average Korean bank.
However, in November 1999 it became clear that the US bank's stake in Koram was up for grabs. After its merger with Nationsbank, the new management of Bank of America decided to sell its 16.8% holding in Koram.
At this point Carlyle enters the fray, bidding for the stake against H&Q Asia. And yet Michael Kim's plans were more ambitious. A bit like Paris's desire for Helen, he wanted it all. That is to say, he didn't just want 16.8%, he wanted a controlling stake.
Nor was Koram as beautiful as she might be. "We could tell right away there was a huge non-performing loan problem," recalls Kim. "But we were intrigued by the earnings power of the bank so I went to the then chairman, Shin Dong Hyuk and said let's face it you need fresh capital. I explained how we could act as a bridge between this time of distress, when they were clearly underwater, and a time when they could find a permanent owner."
Kim promised a fresh capital infusion of $450 million.
An MOU was signed in January and three months of due diligence followed in which Carlyle spent $25 million to comb the bank's balance sheet for every NPL that could be found - using Sanjung Houlihan Lokey as NPL adviser. Kim also hired Citigroup's investment banking arm, Salomon Brothers to advise on the acquisition. It was a natural choice for Kim since he had formerly been the chief operating officer of Salomon in Asia (and the youngest investment banking MD the firm had ever created). Indeed he had only left Salomon one year earlier.
The plan that was taking shape would see Carlyle make the biggest private equity investment Asia had ever seen. But after looking at Koram's 80,000 credit relationships, the US private equity firm knew that the bank's NPLs were closer to $2 billion, than the $500 million that was public.
Carlyle's investment committee were growing nervous, and if that weren't enough the regulator intervened to make things more difficult. Since Koram was not formally a 'distressed' bank, a rule existed that only a licensed bank could buy more than 4% of a 'good' bank. Carlyle patently wasn't a bank, and it wanted to buy around 40%.
Kim's father-in-law, TJ Park was the then Prime Minister and it looked like a waiver would be given, until a cabinet reshuffle saw the practical Lee Hun-Jai (who could see how absurd the regulation was in the crisis circumstances) was replaced as FSC chairman by YK Lee. In short order Lee vetoed the waiver, and Kim was back to square one.
Some creative thinking finally solved the problem. Carlyle approached JPMorgan Corsair, the US bank's investment fund, about forming a consortium. Through verbal dexterity and clever structuring, the regulator was persuaded that since JPMorgan was a bank, the consortium's bid was valid.
However, Corsair was only willing to commit $100 million to the deal, against Carlyle's $350 million, which reflects who the junior and senior partner really were.
By this stage Koram's stock had traded down - from around W9,500 when negotiations started to around W6,500. In October 2000 the Carlyle consortium finalized a deal that saw it buy at an average price of W6,586 per share and get control of seven out of 12 main board seats. The latter point was vital recalls Kim: "It meant we could control strategic decisions, capital raising, management changes and signing off on business plans. It also meant we could control our M&A exit. That was an absolute must for us."
The fight to win control of Koram was an uphill battle that strained every nerve and left many at Carlyle exhausted. But actually the hard work had only just begun.
Manning the ships
Carlyle's capital infusion came at a vital time for Koram, but this new capital needed to be married to a new strategic vision. That required new management. And in one of the ironies of this transaction, Kim raided Citibank to find just the personnel he needed.
Ha Yung-Ku's career at Citi had spanned 20 years. The two men knew each other from Kim's own time at Citi and Kim knew that Ha brought just the kind of holistic skillset that Koram required. Ha had previously run Citi's corporate banking business in Seoul and after a training period in New York had been brought back to head up consumer banking. His experience thus equipped him to carry out Carlyle's strategy to boost Koram's high end consumer banking market share and grow the SME (small and medium enterprise) corporate segment. And coming from Citi he obviously shared Carlyle's view on sound risk management practices and implementing advanced technology.
"I was approached by Michael Kim in 2001," says Ha. "Carlyle wanted a CEO who could lead the bank within its investment horizon of three to five years. They were looking for someone who could make Koram attractive within this time period, and wanted to create a good quality bank that met global standards."
He adds: "Koram was not as big as the major banks, but my strategy was to make it the best quality bank."
He adds: "I always thought the best alternative for the bank and the employees over the long run was to merge with a global player. So from the outset I knew we had to make Koram attractive to global banks. I set benchmarks that I knew would be attractive to banks such as Citigroup. The key was to bring our risk management up to the global standard."
He set out to improve the BIS ratio and coverage ratios, and build up the wealth management and mortgage businesses.
To help in this transformational effort he hired seven other senior Citibankers from the Seoul branch. Thus of Koram's 10 senior managers, seven now came from Citi, and only three remained from the old bank. "The goal was to turn Koram into a mini-Citibank," says Kim.
This new generation of managers were heavily incentivized by stock options (management and staff got options worth 8% of the bank, which equates to $218 million on the price paid by Citi). Says Kim: "You know the old saying: 'You never wash a rental car.' You've got to be an owner and we made them owners."
Quite aside from the improvements Ha and his team were making at the business level, the year 2001 saw a big improvement in overall sentiment towards the Korean banking sector. Stock prices surged in the second half of the year and the credit card business grew rapidly, with investors buying into the Korean consumer debt story in a big way (indeed, investors seemed to be happy as long as money wasn't lent to chaebols).
Ironically, the credit card sector was so hot that Citigroup itself was close to buying a standalone credit card business. The bank had reached the final stages of a deal to buy KEB Card when the September 11 terrorist attack occurred and the deal was scuppered in the ensuing chaos.
It proved a lucky escape, given the troubles KEB Card would face in the credit card meltdown to come.
But to return to Koram, by the first quarter of 2002, the bank's stock was trading up at around W14,000 - which more than doubled the value of Carlyle's stake in less than 18 months.
These were heady times and sitting in Washington, Carlyle's founding partners, David Rubinstein and Bill Conway were probably ready to assign Kim the hero status of an Achilles. This was their largest ever equity investment, and was shaping up well.
With coverage ratios of 95.5% - against an industry average of 75% - there were many who now shared Kim's view that this bank was a jewel. Ha, the new CEO, had successfully marketed Koram's brand around key concepts such as 'young', 'clean', 'sound', and 'high quality'.
And coincidentally enough, consolidation in the Korean banking sector was now gathering pace. This process would lead to the creation of a 'big four' banking groups and at this early stage Koram was viewed by many bigger banks as an ideal bride. In the first quarter of 2002, Carlyle was approached by Shinhan.
Shinhan was looking for quick, clean merger that would help it to catch up with market leader, Kookmin. As a bank that had a strong management vision, and a great consumer banking franchise, Shinhan was a tempting fit.
It is rumoured that Shinhan wanted to do an all-stock deal that valued Koram's stock at between W13,000-14,000. However, Kim was averse to taking stock, and becoming a minor shareholder in a bigger entity.
All that Kim is prepared to say on the subject is: "Shinhan and we had some friendly discussions." But from the outset he had said his ultimate goal was to sell to a multinational bank. That had always been the investment thesis. Kim's view was that if you merge with someone you get their equity and from his perspective that would have meant loss of control, both of the bank and Carlyle's exit. "We are buyout guys," he says. "We like control, both of the company and our exit."
With the Koram acquisition proving abortive, Shinhan continued looking for merger partners. Indeed, it would later merge with Chohung to become the country's second biggest bank by assets.
Kim's decision to go-it-alone meant that a capital-raising exercise was necessary. One of Ha's goals had been to make Koram's BIS ratio the best in the industry, but to do that while still growing was impossible without new capital.
In late April 2002, Koram launched a $218.6 million GDR via Goldman Sachs and Salomon Smith Barney. The deal was priced in tough market conditions, but nevertheless achieved one of the slimmest discounts to spot ever on a Korean deal. In fact, using a 30 day average the deal came at a 2% premium. Priced at W13,400 the deal increased Koram's equity float by 12% and pushed the capital adequacy ratio just over 12% too, putting it on a par with the world's better managed banks. The Carlyle consortium was diluted from 40.5% to 36.5% as a result.
Until the GDR, Salomon had been Carlyle's house bank on Koram-related business. The entry of Goldman was not necessarily a big surprise, however. Kim had been at Goldman before he joined Salomon and had a high respect for the firm. And he had strong relationships at Goldman too. The firm's M&A director, John il-Kwun was mentored by Kim when he was Goldman. (Kwun would, in fact, join Kim at Carlyle in May 2003).
Kim himself recalls that Goldman's then head of investment banking, Michael Carr was so desperate to get his business that he offered to drive him to Chep Lap Kok airport, pitching him in the car.
From this point, Goldman and Salomon vied for Koram's business. In September, Salomon launched $200 million lower tier two subordinated debt transaction for the bank.
However, the mandate that Salomon and Goldman were really fighting for was an advisory one. Kim recognized from the Shinhan approach that an M&A adviser would be required. The board of directors of Koram also required an independent opinion on the bank's strategic options.
The decision to select Goldman occurred towards the end of 2002. Salomon had of course been working with Koram for longer. But Kim may have heard that Salomon had just been mandated to advise Lone Star on its acquisition of 51% of KEB. And if you put yourself in Kim's shoes you can see why he changed horses. Given his investment thesis, he knew that Citigroup was likely to be one of the possible buyers of Koram. Would it open up a conflict if Koram were advised by Citi's investment banking arm? Would Carlyle get the best deal?
No such issues existed with Goldman, and Kim says from the moment Koram mandated the firm, M&A head Johan Leven became like a personal banker. "I've never seen a Goldman managing director dedicate so much time to a deal. He was at every meeting and with us every step of the way."
However, a great deal had changed since the Shinhan approach in the first quarter of 2002. Put simply, the Korean financial sector started to look ugly. Credit card delinquencies were rising at an alarming rate, and going into 2003 the SK Group scandal broke. And quite aside from Korea (and the ever-present North Korea risk premium) the world in the first half of 2003 was grim. The pending Iraq war was creating uncertainty. Moreover, Asia was devastated by SARS, which decimated confidence and business travel. Equity issuance in the first half was so low it made the Asian financial crisis look like a fecund period.
But the range of potential buyers had begun to emerge. Koram CEO, Ha remembers that in mid-2002 he had made a presentation at a JPMorgan Corsair investor conference where a representative of Standard Chartered was present and showed interest. And in August he was invited to make a presentation to the board of Temasek, which was holding a board meeting in Seoul.
And yet in early 2003 the prospects of a sale cannot have looked likely. A FinanceAsia article in March 2003, titled "Out in the cold", pondered (wrongly, as it turned out) whether Carlyle had missed the merger boat - now that all the major Korean banks had found partners.
By April the stock had traded down to W6,000. Koram was a good bank, but as Ha admits when you have a phenomenon like the credit card bust - where some Koreans were carrying eight or nine cards - no one escapes unscathed. "The whole market went through a restructuring process," Ha says. "But we were much less affected and started to make money again from the first quarter of 2004."
Sensing a bargain, HSBC began speaking to Carlyle in the second quarter of 2003. The bank - which had been close to buying Seoulbank several years earlier - had made no secret of its desire to grow in Korea. Its chairman, John Bond had even made a forecast about when he thought the Korean economy would overtake the UK's in size. Wed to this was HSBC's canny liking (traceable to its Scots roots) of buying banks on-the-cheap.
However, at these trading levels it is doubtful whether Kim would ever have agreed to a deal. The bank was trading at around book value, and Carlyle's own entry level was W6,586. With HSBC wanting to enter into exclusive discussions, and Kim always keen on the idea of an auction, there was clear blue water between the two parties.
Then a number of things changed. SARS ended in June and by July the Asian financial markets were starting a major recovery - driven in part by a booming China. The Iraq war ended, and the US economy started to pick up steam. By August, Koram's stock had traded back above W9,000 to a level that equated to around 1.2 times book value.
The battle commences
On August 6, Standard Chartered shocked everyone - including Koram's management and Michael Kim - when it bought a 9.8% stake in the bank for W9,187 per share. This amounted to a $154 million investment and a serious statement of intent.
The stake was bought from Samsung, which was a founding shareholder of Koram. The timing of the sale puzzled many. The most logical explanation is possibly that the newly elected President Roh had made clear that Samsung could never own Koram. The country's dominant business group had long cherished the idea of creating the country's top financial holding company by merging Koram with Samsung Life, Samsung Securities, Samsung Card and Samsung Fire & Marine. This would require a pliant government to change the current law banning chaebols from owning banks, and the chances of Roh doing so had quickly emerged as zero. Meanwhile, Samsung Electronics - now majority-owned by foreign fund managers - had committed to dispose of non-core shareholdings.
UBS was the bank that brokered this trade, and a very clever block trade it looked too. Standard Chartered's decision to buy may have been conditioned by its fear that HSBC was about to acquire Koram and its desire to be taken seriously as an alternative.
Given its hostility to an auction process, Standard Chartered's move did succeed in scaring away HSBC - although the bank never publicly withdrew, it would not end up bidding.
However, StanChart's blitzkrieg tactic was not wholly successful. It had surprised the major shareholder, Carlyle, without ever gaining its commitment to sell. It's 9.8% stake did not represent a blocking position, and was more akin to the way dogs mark their territory through a fit of bladder. In fact, whether it intended it or not, its move simply put the bank in play.
Citigroup's head of FIG (financial institutions group), Noel Kullavanijaya recalls he was in Beijing working on due diligence for China Life the day StanChart made its move. "I got a call on my mobile phone. My immediate reaction was that it looked opportunistic. It was neither a blocking position nor a precursor to an acquisition. All it did was trigger an auction."
One advantage StanChart definitely derived - especially since the stock immediately started to trade up - was to average-down the overall acquisition cost. That is to say, even if it paid W15,000 to Carlyle, the blended average cost of the 50% stake would be only W13,800 thanks to having bought the Samsung stake so much more cheaply.
The next step for StanChart was obviously to obtain Carlyle's stake. In an interesting Korean M&A nuance, the UK bank would be under no obligation to make a general offer to the other minorities if it bought Carlyle's shares. It could simply control the bank with a 50% stake.
However, Carlyle and Goldman were determined to make the most of StanChart's bold move to generate an all-out auction. Says Kim. "StanChart put the bank in play, the stock surged and then everyone hopped on."
Goldman approached potential bidders. A timetable was established that would allow due diligence to run through September and October. The three parties granted the right to conduct due diligence would get two weeks with management and access to the data centre.
At this point, it was not clear that Citigroup was bidding, and the US firm was keen to keep its bid under wraps. It had 200 people working on the due diligence - both from its Seoul office and the region - and yet its presence as a bidder was kept secret. "Korea is a market where everyone tends to hear what everyone else is doing," says Kullavanijaya. "We put our people in six different hotels in Seoul and arranged a mini-bus service. Citi was rumoured to be a bidder, but it was never confirmed."
Kullavanijaya, who had just finished work in August on the $1.2 billion acquisition of KEB by Lone Star, was now advising his parent company, Citigroup on its bid.
On the Citigroup side the deal was being run on a day-to-day basis by Jonathan Larsen, who runs retail banking for Citi in Asia as well as business development. A former management consultant with Booz Allen Hamilton, he was deemed the most logical team leader since a large part of Koram's value and risk lay in its consumer business.
Larsen admits that Citi was probably prodded into action by StanChart's move. "There were a number of conditions and events that meant it wasn't intuitively the most obvious time to invest," says Larsen. "The credit card crisis - which frankly is not yet completely over - was in full swing and there were extremely high delinquency and loss rates across the industry. We are a small but not insignificant player in the local credit card business so we had a window on some of the problems.
"Plus there were also the problems at SK Group, and LG Card. We had to make sure we had given sufficient thought to those issues and that we had a consensus within Citigroup at the most senior levels. We had to be comfortable we could price these issues into a transaction. One thing we don't like to do is waste either our own time or anybody else's if we don't have that consensus.
Larsen recalls the process began somewhat cautiously: "We asked for a fairly large amount of information before even submitting our indicative expression of interest. These were specifically in the areas we thought there were significant risks at the get-go. We didn't want to spend a lot of time and effort and resources on something that wasn't going to fly. The Consortium and Goldman were quite helpful in addressing our top level concerns. They helped us get comfortable that assuming due diligence checked out, this was a property that would be attractive to Citi."
Once comfortable, Citi threw the kitchen sink at the problem of valuing the bank. Two advantages Citi had in the due diligence process over StanChart was the scale of the resources it could commit - it had five times as many people doing due diligence - and its legacy Korean business. It had operated in Korea for longer than Koram and unlike StanChart had operational experience of the local consumer banking market.
"The due diligence was a couple of weeks but inevitably there was a lot of follow-through," says Larsen. "We have a no-stone-unturned approach to these things. My experience is if you don't check everything you usually regret it. Due diligence started in October, and spilled into November and we still had follow up work in December."
He adds: "We had people who had already been analyzing the delinquency patterns of Korean credit card payments, or had an understanding of local human resources law. Or even whether it's something as mundane as valuing the real estate on the books. We break the task into about 20 product or functional areas and put a team of the most qualified people we have on each."
It quickly became evident to Citi that one plus one definitely equaled more than two. There was almost no overlap on the lending side, for example. "We looked at all the portfolios through a Citigroup lens. On the corporate side we looked at aggregate exposures between what they had and what we had, and whether that would require some level of rationalization. Fortunately, there was not a huge overlap."
In November, Citi quietly sounded out the regulators as to whether they would object, and did not get any red lights.
At this stage, Citi knew it was competing with StanChart, but it also became clear that Temasek would bid. HSBC was a dark horse. GE Capital was also rumoured. Kookmin's CEO, Kim Jung-Tae made clear his bank would not bid.
Even at this point it was not, however, certain that Citi would bid. In early December, the board of Citigroup in New York did not initially approve making a bid, because of worries about certain parameters of the deal. A conversation ensued between Citi's then regional head, Stephen Long and Michael Kim that resolved some of the concerns.
It seems that Citi's biggest issue was the necessity for a tender offer. Under US tax rules, Citigroup had to own more than 80% of the bank if it wanted to amortize the goodwill on the acquisition for tax purposes. If it owned 50% or even 79% it would not be able to take advantage of such tax benefits. "That's a fairly substantial amount of money,"says Larsen, " given a purchase price of 1.9 times book value."
Carlyle's Kim was equally-keen on the idea of the winning bidder making a tender offer - it would win favour with the government and minority shareholders and would send out the right message. That message - that he didn't advocate screwing minorities to make a quick buck - would help Carlyle in future deals. "We had created value in the bank, and we wanted to share that with all shareholders," says Kim. "We even said we had a preference for bidders who bought the whole bank and not just our stake."
However, Citi wanted to make sure that any deal it did with Carlyle was conditional on the tender offer succeeding. It was quite clear on this point - as the last thing it wanted was to be faced with a huge tax liability from owning less than 80%.
On December 13, Goldman sent out a draft document on behalf of Koram to the bidders. It asked for a board approved final offer by December 22. Citigroup found the contract attached unsubstantive and did not submit anything by the 22nd.
Kim recalls spending Christmas in Hawaii with his family and still not having a definitive bid from Citi. "I had a pretty anxious Christmas break," muses Kim.
It was at this point that Kim's relationship with his old employer proved critical. In New York, Citibank International's chairman and CEO, Sir Deryck Maughan was the ultimate decisionmaker on the deal. He and Kim knew each other well from when Kim worked under him at Salomon.
There were at least three key phone calls where the deal was on the verge of falling apart until Maughan and Kim spoke to one another. The first of these key phone calls was placed by Kim now, with the Korean asking Maughan whether Citi was in fact serious and going to bid.
Thanks to this personal rapport, Kim got comfortable with Citi's real concerns and more importantly, the fact that it was deadly serious and would bid. Citi put in its bid in the second week of January, just ahead of the Lunar New Year. It quickly gained the status of preferred bidder thanks to both its price, and the business case it presented the Koram board with.
The reasons for StanChart's and Temasek's failure can only be speculated on. In the case of StanChart, the UK bank faced the problem that it would need to raise new capital to fund the acquisition of the entire bank. Carlyle would have faced the risk that this enormous capital raising exercise would not succeed. Carlyle did not have similar concerns about Citi's ability to fund the transaction. Moreover, from the perspective of Koram's management, StanChart's own ownership structure is potentially unstable. Indeed, with the recent death of it biggest shareholder, Khoo Teck Puat, StanChart is the source of takeover speculation itself. This promised the Koram management less long term stability than Citi - whose size makes it nigh invulnerable to takeover.
In the case of Temasek, it is not clear whether the Singapore government's investment fund was bidding as a financial investor or a strategic investor (ie bidding on behalf of DBS, of which it also owns 28%). Since Temasek is not a bank in its own right, it would have needed to get government approval to buy more than 4% of the bank, and it isn't clear that this approval had been granted - and this would likewise have posed a deal risk for Carlyle. Moreover, Koram management wanted to be bought by a bank and not another financial investor.
Citi thus came out on top with a bid price of W15,500 per share and was granted a two week period from February 7 to finalise contracts, hone due diligence and come up with a signed deal.
Glacial contract negotiation meetings in Hong Kong became frenetic towards the end as it became clear there were a few points in the contract that both sides had major problems with. In the 48 hours preceding the signing on February 23 both sides were ready to walk away from the deal. Deryck Maughan and Kim spoke to each other all the way through Seoul's night hours. They hammered out the points. "They were critical issues," says Kim "and I feel confident that if it wasn't for Deryck, it could have gone in a very different direction."
While neither Carlyle nor Citi would reveal the exact points of dispute at this late stage, one can read between the lines. The problem probably centred on the contractual conditions Citi insisted on adding to the tender document.
Citi faced the problem that in Korea only one condition could be attached to a tender offer, unlike in the US, where you can have multiple conditions. In this case Citi's single condition was that the offer would fail if it got less than 80%. However, it wanted the tender to have more carrots and sticks to ensure the tender succeeded.
What resulted was the first US-style tender in Korean history. This exposed Koram Bank to an $80 million fine if the board rescinded its support for the offer (ie if it suddenly switched its allegiance to StanChart) and the tender offer failed. It also made it practically impossible for Carlyle to sell to a third party till well into 2005, through freeze-out clauses. While fairly standard in the US, this was all very new in Korea.
Citi felt it was offering a fair price - which equated to 1.9 times book value - and that via these conditions, the interests of it and the Carlyle consortium would be perfectly aligned (if Citi didn't get 80%, there was no deal).
"The art of getting these things right is hitting a sweet spot," says Larsen. "If we had crafted a deal that was not fair, the tender would not have succeeded, which would not have been a productive exercise."
Going into the tender, Citi also managed to get a commitment from Capital Group to sell its 7%. This put Citi over 43%, but it still remained to be seen what StanChart would do.
The tender was set to run from April 3 to April 28, and they were nailbiting times. Much of the stock had ended up with hedge funds and arbs, and for the real fund managers, it was more tax efficiently to sell to certain hedge funds - due to specific structures they'd specially created - than to tender the stock directly to Citi.
All this meant that very little stock was tendered till the last couple of days. Adding to the confusion, the four custodian banks did not bother passing information about tendered stock till the last hours - and in the case of one custodian the last minutes. Helpfully, however, Standard Chartered announced it would tender its stock on April 23, thus ending speculation that a counter-offer might be launched.
In spite of this, even on the penultimate day of the tender only 48% of Koram's stock was in Citi's hands. That was 32% less than Citi and Carlyle required. Then on April 28, the final day, the stock flooded in like a biblical deluge. Suddenly, the US bank had surpassed its best expectations and received 97.5% acceptances - enough to even delist the bank, which it now announced it intended to do. The total cost of the acquisition was $2.73 billion.
In May the Carlyle consortium received its cash, having made an estimated IRR of 28%, or a 2.5 multiple of equity invested. Analysts reckon it took out profits of close to $1 billion. "This was also the largest overseas investment in Korean history," says Kim to highlight the deal's significance. Standard Chartered made a $90 million profit on its stake too - not bad for nine month's work. Equally happy is Goldman, whose fees for the deal are reckoned to amount to $16 million.
Reaction to Citi's victory was favourable. Even President Roh Moo Hyun used it to extract political capital: "I don't think Citigroup would invest in South Korea if it didn't have confidence in the leadership. Citigroup probably judged that the outlook for the Korean economy, the financial regulatory system and security are alright."
Inside Troy's walls
The reaction of Korean banks was equally strong. The CEO of every major Korean bank called a press conference to explain how they would adapt their strategy to deal with Citi's entry. The Korean press called it the "Citigroup hurricane effect".
With the acquisition, Citi has emerged as the fifth biggest bank in Korea, with over 230 branches, 5,300 SME customers, 6 million retail banking accounts and 3.3 million credit cards.
For the first time in modern history, a foreign bank has a meaningful market share in Korea, the world's 11th biggest economy.
"They got a great bank," says Kim. "It's a clean bank; it's made in their image; it's run like a mini-Citigroup."
The reaction of its local competitors was mirrored only by the intensity with which Koram's own union greeted the deal, calling a strike which only ended on June 12. For more on the strike, see this month's Editorial on page 1.
Citi's entry is a threat and an opportunity for the Korean banks, says Scott Seo, JPMorgan's local bank analyst. "It will force Korean banks to develop and become more sophisticated, particularly in the area of risk management," says Seo. "This is precisely what Lee Hun-Jai wants to see happen and is positive for the evolution of the Korean financial system."
Seo believes Citi will use its superior risk management to carve a profitable niche in the sub-prime lending area and will also benefit from bringing its global product offerings and global network to Koram's SME clients. For example, he notes that only KDB is actively lending in renminbi to those SMEs that have set up operations in China. Thanks to its China platform, Citi will be able to help finance SMEs in China too. The same applies in India and Vietnam where Korean firms are also opening operations. Likewise, Citi can offer its advanced cash management and trade solutions to these clients, and use them products to poach SMEs from rivals too.
"Koram has given us a dramatically bigger footprint than we had prior to the acquisition,"says Robert Morse, who took over as regional head of Citigroup's GCIB business in the Asia-Pacific region from Stephen Long in late February. "It has approximately 220 branches and we had 12. Our corporate banking and investment banking presence had been limited to a high end, large corporate strategy, and this will allow us to go much deeper into the Korean market. We feel positive about Korea as an economy and Koram has 5,300 SME clients. We feel that their customer penetration of that sector along with the broader range of products that we have should allow us to maximize opportunity with those clients but hopefully take that and expand even farther. And likewise in the consumer market.
"Indeed, when you get to the lower end of the SME scale, a lot of them are run by entrepreneurs who wants to do his or her corporate and consumer banking all in one place. We think our consumer and corporate businesses combined with Koram's is particularly appropriate at that level of the SME market - where together, we can do a better job of providing the full spectrum of needs than anybody else."
The merged entity - whose name will be decided before year end - will have a 6% market share. YK Ha - who has signed a long term employment contract and will run the new entity - has a goal of taking that to 10% in quick order. In the first quarter, Koram made W118 billion of profit, and analysts reckon that Citi currently makes close to $200 million per year from its Korean operations. The entirely plausible goal is to generate $1 billion of profit from Korea per year.
This, of course, will substantially increase Asia's contribution to Citi's global P&L.
Indeed, the Koram deal has ramifications not only for Korea, but for Citi's strategy in Asia as a whole. It marks the first time that Citi has bought a bank in the region and fully implemented an embedded bank strategy. And since Koram has a large branch network, it suggests a revision of Citi's former branchless banking strategy. Third, more acquisitions of Asian banks by Citi look likely to follow.
Morse says Citigroup has identified China, India, Taiwan, Hong Kong and ASEAN - the majority of markets in this region - as global priority areas. Says Morse: "In those Asian countries we will be looking at opportunities to grow both organically as well as by acquisition - if the time is right, and the opportunity exists. We are not shying away from acquisitions, but at the same time we are not desperate to do acquisitions. But there will be other instances like Koram where a local bank, coupled with Citigroup globality and global products can really add value to one another."
It is, says Morse, all part of Citi's ambitious targets for growing the business in the region. "Citigroup as a company has some pretty ambitious growth plans for Asia. Our earnings in Asia have doubled through organic growth alone, over the past four years, and we now contribute around 10% of the company's net income. That's more than any other region. The GCIB in Asia posted $308 million of net income for the first quarter, nearly a 70% increase over the same period in 2003."
"We look at Asia as place that has a lot of attributes that appear to be very favourable going forward. Our own internal forecast anticipates world leading GDP growth in Asia for the next five years. We expect the region will grow at 6.2% over the next five years."
Koram is the prototype of what's to come - and not just in regard to Citi, but probably HSBC too (which has watched the Koram acquisition with more than passing interest and may have finally reappraised its strategy of only buying banks on-the-cheap).
Of course, the pressure to make the whole thing work, lies with YK Ha. "My strategy is a growth strategy," he says. "We may even open more branches."
Meanwhile, he laughingly admits that he never expected to end up working for Citi again, especially after his dramatic departure in 2001. And he likewise admits to feeling a lot of pressure: "When I was in New York there was a joke from one of the senior's at Citi. He introduced me to someone by saying 'We have paid the highest ever headhunting fee for this guy - close to $3 billion.' So that pressure is on my shoulders."
