Q: ABN AMRO has been restructuring its investment banking operations. How does the new sectoral approach work?
A: We’ve tried to develop a more focused structure. We now have five sector groups: integrated energy, telecoms-tech-media, FIG, public sector, and diversified – with the latter focusing mostly on consumer goods and automotives. They are responsible for marketing and selling the full product range of the group. We’ve identified our major clients under four headings: priority, core, key and low maintenance. So there is a different degree of focus depending on where the client sits. The marketing and origination process is a partnership between client people and the corporate financiers, who will tend to have high-level relationships. As a consequence, corporate finance is also arranged on sector lines.
That, in a nutshell, is where we are. In Asia we are still in the process of putting all of that in place. We are doing this later than all of our competitors, which is a plus and a minus. The plus is that you learn from the mistakes your competitors made and get from A to Z more quickly. The minus is that most groups have been through this already, and are now able to focus purely on the business. In the meantime we’re still recruiting, reorganizing and restructuring, which is diverting for senior management.
The other thing we’ve done is to designate some countries as priority focus – although, in general, our new sectoral approach tries to de-emphasize geography in favour of global sector business units and reporting lines. We have designated two countries in Asia, as priority focus; not surprisingly, they are Japan and Greater China. I have the job of chairing the Greater China committee, which means I’m responsible for coordinating the strategy and product delivery for the wholesale banking business into Greater China.
Q: I understand Greater China has a special direct report into the board of directors in Amsterdam.
A: Yes, you’re right. A board member has specific responsibility – not to manage it in a day-to-day sense – but to monitor and be available to help get things done. In the case of Greater China, Sergio Real – who used to run Asia – is the board director with that role.
It’s not a reporting line, but more of a line-in. I can pick up the phone to Sergio to discuss a problem relating to Greater China and he will provide a view on the board’s preparedness to commit resources and capital and then help get it done.
Q: The rest of Asia reports into which board member?
A: The other countries don’t have a specific board member assigned to them. They operate purely on a product line basis. But each country has its own country representative and origination/coordination committee. It’s really to give some sort of teeth to the sense we are lessening our geographical focus, and strengthening our product and sectoral focus.
Q: When you speak of these priority clients, how would they be split around the region?
A: I would say that, excluding Japan and Australia, Greater China would represent about 50% of the priority companies – with a heavy concentration in Taiwan and Hong Kong. In the rest of the region, the heaviest concentration would be in Singapore and India.
Q: Not Korea?
A: Less so in Korea. And in the other countries in the region we would be looking at one or two priority clients in each country. If we use 100 as a number, 50 companies would be Greater China, 10 would be in Singapore and 10 in India, five in Korea and the balance throughout the rest of Asia.
Q: Most firms seem to be de-emphasizing Southeast Asian countries these days – with the exception of Singapore.
A: Singapore is interesting because there is a lot of internal restructuring to do, plus there’s a lot of emphasis on expanding outside Singapore, and there’s available capital, so there’s lots of interesting ingredients for the M&A business. And as these companies make a push out of Singapore, they will need financing as well. Singapore will continue to be active. It may be a small country, but it carries a considerable financial clout in the region, and punches way above its weight in that context.
The way we see it – if you look around the region – there are one or two large M&A deals evolving in each country, of, say $750 million plus. The fee levels are also rising with the deal size, which is positive.
On the ECM side, the fees are fairly static as business is incredibly competitive. Underwriting fees are being squeezed.
But on the M&A side, the deals are getting larger and more complicated, and the fees are going up.
When I first started doing M&A in Hong Kong in 1994, if you made a $3 million fee on an M&A transaction, that was a groundbreaking event. In fact, I was involved in one deal where we made that exact fee and it was a big day! Now those sorts of fees are relatively common and fees in the $5million-$10 million range are becoming more prevalent.
I am very optimistic about the M&A business in Asia. You only have to look at the restructuring, consolidation and rationalization that is required, coupled with the generational change in family businesses, i.e., the arrival of a new generation more schooled in Western business practices with MBAs, etc.
The economic crisis accelerated a trend. For many years Asia has been a very forgiving environment to make money in. The growth rates have been high, there’s been a lot of monopolistic and inefficient behaviour protected by barriers to foreign entry, and an oligopolistic business environment in many cases intertwined with politics. It made a few people very wealthy. It means the number four noodle maker can still make money in a four-player market. What the crisis did was to force the opening up of markets to foreign entry and competition, and so all of a sudden you can no longer be an inefficient minor player in a market and make money. People are gradually focusing on things like core competencies, management efficiency etc. Where you don’t have a competitive edge you will have to sell or find a partner. So the old Asian conglomerate model – with a bank, a property group, a cement company, a food manufacturing business all under one structure – is being dismantled.
Q: What’s your view on Taiwanese M&A into China?
A: It’s still likely to be more about direct investment than M&A. There’s a huge amount of interest from multinationals and private equity groups, however, about inward investment into Taiwan itself – especially in TMT and FIG, with banking consolidation and access to the Taiwanese life and asset management market.
Q: How big will China be as an M&A market?
A: On the assumption that WTO goes ahead, that has accelerated multinationals’ desire to establish a strong foothold in China. They can only do it by acquisition if they want to build critical mass quickly. There is, however, an issue surrounding the shortage of targets. In some key sectors – leaving aside banks and telecom – if you look at manufacturing, consumer goods, there will still be a shortage of targets. There will be issues of control, legal framework and transparency, but the big feature of China M&A will be the rise in private sector activity as local entrepreneurs emerge and VC investors sell out.
Q: Are you in hiring mode?
A: We are looking for one or two senior people on the origination side. And maybe one or two professionals on the execution side.
Q: How many are you?
A: Corporate finance and ECM together – excluding Australia but including Japan – the total headcount is 140 or so.
Q: And if you exclude Japan?
A: We have hardly anyone in Japan, so it would be 135. We’re hiring in Japan.
Q: How many people do you have who could run an M&A transaction?
A: All the corporate finance sector heads – which is five – plus our head of execution, and myself, and a number of other directors. All in all it’s probably eight to 10.
Q: Has the prospect of a U-shaped recovery in the US changed your strategy, or is it pretty much still in place?
A: It’s pretty much still in place. Everybody’s taking the view it’s U-shaped or V-shaped. If it turns out to be L-shaped, that would create a different view. There’s no change to our strategy, and in a sense it’s easier to implement it in a market where you don’t have the competitive hiring pressures we’ve had in recent years. We will emerge in the next six months in much stronger and better shape.
Q: The way you’ve restructured, does that means there is no longer a head of Indonesia, or Thailand, etc?
A: We strongly believe in country representation. You can’t just fly in and fly out. You need one or two good corporate finance people in each country.
Q: But has this sectoral approach pulled more people into the centre, i.e., Hong Kong?
A: Yes we have increased our headcount in Hong Kong and in our satellite office, Singapore. I am quite happy with the way things are going. We are now only offering our balance sheet to companies that are prepared to give us higher margin business as well.
Q: And that’s working?
A: Yes. I am hopeful we will announce a couple of large M&A transactions in the next two months that show how we have put our balance sheet to work.
Q: What percentage of your investment banking revenues will come from M&A this year?
A: On a gross basis, I would expect 65% from M&A.
Q: That would be a record, wouldn’t it?
A: Yes. But if you look at the deals being done: we are in the process of finalizing the San Miguel/Coca Cola Amatil deal – that’s a $1.2 billion deal and a very complex one. The deal sizes are getting larger, and are quite serious now.
Q: You advised San Miguel?
A: Yes. We have worked on a few deals for San Miguel. We think the management is doing an excellent job in repositioning the business and creating a platform for longer term shareholder value enhancement.
