CMB-Wing Lung deal: Market still wary nine months later

Nine months after China Merchants Bank (CMB) made headlines in its buyout last October of Wing Lung Bank in a massive 36.3 billion yuan deal, the market remains haunted by concerns whether the 75-year-old family-run Hong Kong lender deserved such a high price.

Yet Zhu Qi, vice-governor of CMB and CEO of Wing Lung Bank, shrugged off such worries and has set about building Hong Kong's fourth-largest lender to what he said will be a leading mid-sized bank in five years.

"Given the huge synergy that can be generated from the integration of the two banks, it is expected that Wing Lung's market value will surpass CMB's acquisition cost within the next five years," Zhu said.

Though Zhu, chief strategist of the integration, was confident about the bank's future, the market remains wary of the pricey acquisition.

Last May, CMB offered to buy out Wing Lung at a price of HK$156 per share, 2.9 times the lender's book value at the end of 2007. The deal was finally settled after CMB paid some 36.3 billion yuan for nearly 98 percent of the Hong Kong bank.

Wing Lung has since taken a hard hit from the global financial crisis, recording a consolidated after-tax loss of $816 million in 2008, mainly attributable to the collateralized debt obligations it held and structural investment vehicles.

"Any company that initiates international M&As looks more toward the long-term strategic value that the target company could bring about, rather than immediate returns," Zhu said, citing four previous M&A opportunities he was involved in over the past 14 years when he worked in Hong Kong's banking industry.

"With the economic and financial conditions improving, Wing Lung's strategic value will become more obvious," he added.

The acquisition of Wing Lung made CMB's core capital adequacy ratio drop 1.44 percentage points to 6.56 percent by the end of 2008, but Zhu said the deal has given CMB a competitive edge with international peers.

"Taking Wing Lung as a gateway to the international financial market, CMB will gain clout rapidly in a global financial center - Hong Kong," Zhu said.

It will also help CMB extend its business into Southeast Asia and become a springboard for the mainland's sixth-largest lender to develop into an international financial institution, he said.

The Hong Kong-based bank now has a network of 36 branches in Hong Kong, two branches and a sub-branch in Shenzhen, Shanghai and Guangzhou, as well overseas branches in Los Angeles and the Cayman Islands.

"It would be hard for CMB to find another acquisition candidate like Wing Lung in the near term whose development is based on similar Chinese traditional values and cultural backgrounds," Ma Weihua, president of CMB, told the spring summit of the Institute of International Finance in June.

The two banks can realize great synergy by sharing their customer base, cross-selling banking products and developing cross-border business cooperation, he said.

(China Daily 07/06/2009 page4)