Sell-ING equity

ING exits Asian broking. What''s behind the decision and who''s the buyer?

There are some events which carry a certain air of inevitability, such that when you hear of them, your surprise is sharp but brief. Such is the news that - pending due diligence - ING will sell its Asian equity broking operations. The Dutch firm's exit from equities had been forecast by many in the broking industry, with predictions first mooted of its departure over two years ago.

Indeed, after the closure of SG, WI Carr and Dresdner's Asian broking operations, there were some who predicted ING would soon follow suit.

To its credit, ING is exiting Asian broking with somewhat more dignity than its European counterparts. The latter simply closed shop, while ING tuffed out the tough times. It managed to retain a credible position in secondary equity trading and equity research and now with the pick up in Asian equity volumes in the past nine months, it is selling its operation in good markets.

No price has yet been disclosed but the prospective buyer is Australia's foremost investment bank, Macquarie. It will buy ING's Asian sales trading and research operations in 10 countries around the region, plus sales teams in Europe and the US. This will automatically add 380 staff, and give Macquarie a footprint that includes Japan (although not India, where ING has no equity operation).

The business which Macquarie is buying is ranked around 8th in Asia and as one rival broking head put it: "The fit is good. The Australian business of Macquarie and ING's Asian operations are very complementary. And the broking business in the region has now become much more lucrative."

Indeed, the broker estimates that there has been a "material change" in the profitability of the Asian broking business thanks to the fact that Asia has come back into favour and flows have surged. "Commission revenue is now running at double what it was in the second half of last year," says the broker.

This tends to suggest that ING will sell its operation for a reasonable price. The last time a bank tried to sell a broking operation in Asia, of course, was in very different conditions. Just after the financial crisis, Barclays sold its BZW Asian franchise at probably the worst possible time and in the worst possible manner. CSFB picked up the franchise for virtually nothing (around $20 million for six broking operations in six countries). Judging by the timing of this sale it looks like ING has learned some valuable lessons from that process.

As part of the deal, ING will also sell its equity capital market operations to the Australians. However, apart from a $285 million GDR at the end of last year for IBK, ING has led very few issues and after Paul Kelly and Craig Duffy departed this business lost much of its direction. If it intends to make a mark here, Macquarie will have to rebuild.

Meanwhile ING will be left with the equity derivatives business, which it will relocate to Singapore. It will then focus on M&A, debt capital markets and structured products.

Says ING spokesperson, Sheel Kohli: "The equities business was not core to what we're trying to be in Asia. We think we are good at the value-added businesses, where we target a select group of clients and cross-sell."

He gives the example of Malaysia's EON Bank for which ING recently launched a $225 million bond having been an adviser on a previous M&A transaction for EON and helped with its backdoor listing.

These businesses tend to be steadier and play more to the strength of the Dutch firm's balance sheet. Equities has a large fixed cost base, and in Asia has suffered from very volatile market conditions that have seen it go through long periods where broking has been unprofitable for the vast majority of participants.

ING's core business globally is insurance. Fund management is also a key. But investment banking is the part of the franchise that has most struggled to prove itself to shareholders, although that may be changing. Results for the first nine months of 2003 were encouraging, with €1.3 billion of profit made from its corporate and investment banking division, but virtually none of this came from equities.

As for Macquarie, the drive into Asia is part of an overall strategy to grow out of Australia, where the firm has a highly profitable business. As stated in FinanceAsia's November cover story 'Dead cautious: why Asia eludes Australia's banks', Macquarie is a leader among Aussie institutions in the region.

It has entered into partnerships around the region to export its financial technology to more lucrative Asian markets. For example, it has taken its toll road financing expertise from Australia and gone into partnership with Shinhan to build a similar business in Korea. It is pioneering the Korean REIT market. It manages a property trust in China.

In seven years Macquarie has gathered assets worth A$6.6 billion in Malaysia, Korea, Taiwan and Hong Kong. "Our partners provide us with an accelerated entry into domestic markets by allowing us to plug into distribution networks that would otherwise take us years to build," Macquarie's head of bank funds division, Ben Bruck told FinanceAsia in November.

In the field of broking, this is Macquarie's third attack on the region, albeit from different directions.

It first attempted to set up its own broking operation and grow it organically. It beefed up research before deciding to close it last year, because it failed to hit critical mass.

In tandem with this approach, in October 2002 it set up a cooperation agreement with CLSA. This saw the two firms offering each other's clients their research ie Macquarie offering CLSA's Asian clients its Aussie research, and vice versa, as well as driving trading flows to each others platforms. Macquarie also got to participate in CLSA's highly respected annual investor conference in Hong Kong, that brings together top companies and fund managers.

Indeed, speculation was rife that this 'partnership' would eventually lead to Macquarie buying CLSA (as opposed to ING). However, the relationship didn't develop as deeply as was hoped, although the two are still jointly participating in a forthcoming China conference in Beijing, where each will bring 35 investment firms.

Strategy three - with organic growth and alliance proving unsatisfactory - is to make an outright acquisition of a meaningful player, ie ING.

However, now that Macquarie is entering the big league of Asian broking on it own (via acquisition) and is becoming a direct competitor to CLSA, it cannot be long before their agreement totally dissolves. It is hard to imagine CLSA allowing Macquarie to participate in its conference after its completes its takeover of ING's broking business.

Macquarie, meanwhile, is buying a business with 380 staff, of whom 250 are in the front office and about 60 are in equity research, led by Adrian Faure.

The more open question is staff retention. With markets in Asia hot - provided bird flu doesn't escalate as SARS did - headhunters widely expect to be very busy come March 1. Most firms will have paid their staffs bonuses into their bank accounts by the end of February, at which point a bout of hiring is expected to be triggered.

Whether all of ING's equity broking staff feel they fit into the Macquarie culture will be enough - in the circumstances - to make them welcome headhunters calls even more than normal.

This tends to suggest that Macquarie's key challenge will be keeping key people - so aside from the cost of acquiring the business, it is likely the Australian bank will also need to offer guaranteed packages to those people it is keen to keep.

However, should Macquarie manage this transition well it is in a strong position to succeed. The firm is nimble and will be able to focus on research excellence and independence, at a time when both are critical. And with Asian broking volumes rising fast, it is entering the business at the start of a bull cycle.

As for ING it is the end of an era. The firm bought the Barings franchise for a dollar after the Nick Leeson scandal and at that time the Asian broking operation was probably regarded as one of the crown jewels. Built in the early 1990s by the larger than life, Christopher Heath, Barings Securities was to become the largest and most profitable Asian broking franchise during the first Asian bull run, and was the first to introduce serious equity research to the region. Anyone who has been in the region for any length of time remembers the glory of the old Barings equity operation.

Macquarie, therefore, will be hoping that it can return the franchise - under its own brand - to the top echelons of Asian broking, and if the markets continue as they have, back to similar levels of profitability.

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