Samsung Securities is shutting down almost all of its operations outside Korea, putting a stop to an aggressive expansion that had aimed to create a leading regional player in Asia by 2015 and one of the top 10 financial players worldwide by 2020. The decision, which came as a shock both to employees and the market, was communicated internally yesterday afternoon and sources said a formal announcement will be issued this morning.
The difficult market conditions and expectations of a continued poor operating environment were referred to as key reasons for the drastic move, the sources said. However, the firm had been hiring up until the end of last year, which makes yesterday’s announcement seem rather sudden.
“Up to the last minute, everything has been about forward movement,” one employee said, shortly after being informed of the firm’s decision to pull the plug on the regional expansion.
The closure will include the overseas capital markets, corporate finance, equity sales and research divisions that are run from Samsung’s international headquarters in Hong Kong. The overseas business also has offices in Shanghai, Singapore, Taipei, Tokyo, London and New York.
The firm will continue to provide brokerage of Korean equities for international investors (see AsianInvestor interview with Samsung Securities’ new CEO, Kim Suk), which is a business that the Korean firm had before it started its ambitious regional expansion in August 2009. Sources estimated yesterday that this business accounts for a small portion of the firm’s overseas employees, which according to its latest financial report numbered 170 people at the end of September.
As of last night it was unclear how many of these 170 people will lose their jobs. Senior staff are scheduled to meet with management over the next few days.
The news of the closure comes just three weeks after Royal Bank of Scotland announced that it will exit its cash equities, mergers advisory, corporate broking and equity capital markets operations, and serves as another reminder of the challenging market environment that has forced thousands of job cuts across the investment banking industry globally in the past few months.
The equity brokerage industry in Asia is faced with excess capacity and decreasing volumes and even well-established firms are finding it tough to make money. And, on top of that, deal activity and fees in the capital markets also dropped significantly last year. To be building a new business in that kind of environment is clearly not an easy task.
“Am I surprised that the industry is reducing capacity? No. Investors are only able to spend each dollar once,” said one source. “But the fact that [Samsung] is pulling out altogether is surprising. It is sobering news.”
Indeed it is. Samsung is one of Korea’s largest securities firms and it has been putting a lot of resources into its regional expansion. It was viewed to be making progress and people in the industry say that the firm has been gaining momentum with clients since the first quarter last year. It had also been building a good sales and research team under the leadership of Asian CEO Sung June Hwang, who joined Samsung in August 2010 to help drive the expansion after successfully building a competitive brokerage business at Credit Suisse.
By February last year, the firm had a research team of more than 40 analysts in Hong Kong and had expanded its sales effort with the hiring of two sales teams from Macquarie in Singapore and London. It was also beefing up its presence in investment banking and was planning to hire 20 more corporate finance bankers last year to add to the seven bankers already on board at the time. It is unclear how many bankers it actually did add, but according to a source, the hiring had been kind of slow. The firm is, however, said to be sitting on a healthy pipeline of ECM deals, of which some were ready to be executed late last year before the markets became too challenging.
The same source estimated that the firm currently has about 150 people in the Hong Kong office, spread across sales, research and investment banking. Samsung’s six-month earnings report put the number of Hong Kong employees at 130 at the end of September, including a sales force of 34 people. The rest of its overseas employees were based in New York (13), London (12), Shanghai (9) and Tokyo (6), according to the same report.
The build-out has been aggressive, so it is surprising that Samsung is pulling the plug on its international expansion after little more than two years. Perhaps it was hoping to make money from the international business a lot sooner, but sources say it is almost impossible to build a brokerage business from scratch in less than three years and for it to become profitable could take longer than that — especially at a time when global stock markets are still recovering from the worst financial crisis in decades while simultaneously facing a credit crisis in Europe and lacklustre growth in the US.
One source noted that the lack of patience in building the business does perhaps relate back to Samsung’s background in the technology industry — the group is one of the top global manufacturers of semiconductors, computers, mobile devices and LCD TVs, among other products — where you can roll out a new product in about six months.
“Building a securities business takes a lot longer than that,” he said.
Samsung’s closure is likely to fuel speculation about further cut-backs at other firms, especially those that have set out to build Asian equities and investment banking operations in recent years.
And one source on the sales side noted that the move could also make it more difficult for other new businesses to compete as investors who have made the effort to go through the paperwork and set up an account to trade with Samsung in the past year may think twice before they embark on this procedure with another firm.
“If markets don’t improve in the next few months, I think we will see another wave of cut-backs in April or May, after the first quarter earnings,” the source said.