The Beijing Olympics is due to begin at 8pm on 8 August 2008. Outside of the numerous Chinese communities around the world, this little-known snippet of news is unlikely to muster even a raised eyebrow. But with Chinese culture steeped in superstition - this will register with most people of Chinese origin.
For those not in the numerical circle of trust, the number eight is considered auspicious in China because its pronunciation in Cantonese sounds the same as the word meaning 'to make money'.
And superstition was a prominent consideration in the minds of the owners, landlords, developers and agents of Two International Finance Centre (2IFC) in Hong Kong. Wishing to surpass Central Plaza as Hong Kong's tallest building yet retain the 88-floor structure so commonly found in greater China, the owners and developers simply stipulated higher ceilings. And the advertising gurus at the Financial Times, HSBC and Cathay Pacific would no doubt be able to provide glowing testimonials.
Calmly gazing out at the harbour reclamation work from his 52nd floor Thomson Financial office at 2IFC, UBS managing director of legal and compliance Duncan Bell does not strike you as a man who would place much stock in lucky numbers and superstition. But Bell is not confident that the hectic amount of deal activity witnessed during the first half of the calendar year 2005 will be replicated in the second half. "From our point of view it's been a fantastic year. We have issued more equity than anybody so far this year, and in terms of fees we're ahead of budget. However, we don't think the second half of the year will be as active as the first," he says.
"But then if you looked at the start of 2004, everybody was saying it was going to be a really bad year because there were about five elections to come in Asia, as well as the US elections, and oil prices were relatively high. Yet most investment banks had their best year since the tech boom of 2000."
Performing admirably in the latest batch of Thomson Financial tables reviewing M&A and debt and equity activity throughout the region ex-Japan for the first half of the year, UBS can already list the COSCO IPO among its 2005 credits and will soon be adding the multi-billion dollar ADRs of LG Philips and Taiwan's largest phone services company, Chunghwa, to that list.
But Bell points out that the largest of the year's anticipated 'H' share offerings have already come to the market and that the re-born Link REIT is its only Hong Kong deal of any real significance lined up for the second half of the year, with a similar story at the other investment houses.
The other two joint global coordinators on the Link REIT, Goldman Sachs and HSBC, also came together on the recent Bank of Communications' IPO, while the rival houses at Merrill Lynch and Deutsche Bank advised as joint global coordinators on the US$2.9bn IPO of China's largest coal producer and export coal producer, China Shenhua Energy Company Limited - the largest IPO worldwide to date this year.
Thomson Financial The Shenhua IPO was largely responsible for propelling Merrill Lynch to the dizzy heights of leading bookrunner for Asia Pacific common stock for the first six months of 2005. The firm was responsible for managing US$3.4bn of deals capturing 12.2% market share.
Unlike UBS' Bell, one Hong Kong-based counsel at a rival firm is bullish over prospects for the remainder of the year. "Deal activity is picking up and a lot of bankers are being hired."
Outside of Hong Kong, he says, Indian deals are hot at the moment. The subcontinent was the second most active market for equity offerings for the first half of 2005, pulling in an outstanding US$6.3bn from 41 issues - or 46% higher than the US$4.3bn raised in the previous year. But fee pressure, he adds, means the jurisdiction can hardly be considered a revenue bonanza.
Meanwhile after years of political of instability, markets such as Indonesia are said to be bouncing back. This year Merrill bankrolled the first cross-border securitisation since 1997. The Wall Street firm acted as sole structuring adviser and bookrunner, and also joint lead manager with PT Danatama Makmur, on the US$600m securitisation of mining units - PT Kaltim Prima Coal (KPC) and PT Arutmin Indonesia - of BT Bumi, one of Indonesia's largest coal producers. "Indonesia is a tough market with legacy issues," says one lawyer. "There have been several examples where issuers have tried to back away from their debt obligations."
But while the investment houses offer a fairly wide range of services to key markets in other regions such as Korea, Taiwan and Southeast Asia, the focus for everybody in Hong Kong is China. China remained the largest market in the Asia-Pacific region for equity offerings for the first half of the year, with nearly US$6.4bn in proceeds from 39 issues. While this is a marked drop in equity business from the US$15.2bn raised through 109 deals over the first half of 2004, a spate of PRC company listings in Hong Kong has ensured the SAR generated the most number of deals with 71 issues with a value of over US$6bn.
"I'd say there's very much a focus on providing advice to the investment banks for China & in terms of the fee pool for equity they're really elephant transactions," says Bell. "We're very cognisant of the changing landscape in China. The PRC in general is resource hungry so it needs to lock-in long-term contracts for commodities. The investment banks are very con.dent that there'll be a lot of acquisitions into the commodity countries of Australia and Canada, for example."
And on the cross-border M&A front, China National Offshore Oil Corporation's unsolicited competing US$20.4bn takeover bid for Unocal Corp - the largest announced Asian M&A deal this year - is just the latest transaction in what is expected to be a surge
"Everyone recognises that that market will be phenomenal," says one investment bank lawyer, adding that Mandarin speaking lawyers are able to pretty much name their price at the moment.
Who let the dogs in?
Morgan Stanley was the top ranked firm for announced M&A deals in Asia for the half of 2005, having advised on five of the top 10 deals. The firm also ranked first in the completed league tables.
Succeeding UBS-bound David Graham at Morgan Stanley around the middle of 2004, managing director and general counsel for the Asia Pacific region, Greg Terry, says the spate of China listings in Hong Kong can be partly explained by the wariness of listing in the US post Sarbanes-Oxley.
But while China-related activity has everyone in a spin, not every potential Hong Kong listing is a Shenhua. It has been estimated that among the 300-odd PRC companies seeking an overseas listing, a good number are what has been described as 'dogs'. That is, non-starters.
"It's a question of trying to pick pro.table transactions that you think will close on a timely basis," says Bell. "Some of the PRC deals may take a year or two. The China Construction Bank IPO probably ran for a year and a half, so these things are resource intensive & you have to carry a lot of 'work in progress' on the balance sheet. A lot of firms are therefore having a look at other niche areas, such as shorter dated products like debt, convertible bonds, equity-linked debt and straight debt - where you can get in and get out and the execution risk is lower."
With so many dogs on the prowl, the Hong Kong Stock Exchange is also looking at mitigating its risk by tightening the regulation of listing sponsors. Effective 1 January 2005, the Securities and Futures Commission (SFC) published proposals amending the HKSE's listing rules and introducing a new Practice Note (21) on due diligence by sponsors in respect of initial listing applications.
Practice Note 21 essentially requires the sponsor to conduct reasonable due diligence inquiries as part of the IPO process, and not simply accept at face value the accuracy of the information supplied to it by the issuer. "If you asked me what's keeping people awake at night on the investment banking side I would say Practice Note 21," says Bell.
The underwriters are being asked to give a financial accounting blessing to the regulators, as per Rule 404 of Sarbanes- Oxley. Rule 404 requires each annual report of an issuer to contain an 'internal control report' which, among other things, looks at the responsibility of management for establishing and maintaining an adequate - and effective - internal control structure and procedures for financial reporting.
With similar regulatory changes in Singapore it's the one area where the banks are making greater demands on their external advisers, says Bell. "While this doesn't affect execution standards, we now know that's an enforcement tool that the regulators are looking at that we need to make sure we cover."
But, like in the UK, it may be the accountants rather than lawyers in private practice that have the most to gain. "There are a couple of areas as a practical matter where it is difficult to fully satisfy the regulations. For example, one of the areas of Practice Note 21 relates to internal management controls. So we've extended the role of the accountants to provide the equivalent of a long form report that they give in London," says Bell.
"That's not to say that we're also not doing that. But we look to the accountants because that's what they're trained to do."
A cynic might suggest that, rather than pick up the politically sensitive baton of going after the PRC state-owned enterprise 'dogs' themselves, the SFC and the regulators are seeking to push more of the due diligence liability onto the investment banks through Practice Note 21.
But Morgan Stanley's Terry for one says it's premature to be speculating on the effects of the regulatory changes. "It's certainly not dominating my time or that of my colleagues at the moment. [Practice Note 21] will have some impact but it's too early to say how material."
So with deal activity in the region expected to plateau later in the year, and the accountants likely to be the beneficiary of the recent regulatory changes, how and where can law firms secure more work from the investment banks?
It is primarily a headache for the leading Wall Street firms and Magic Circle firms, says Jones Day partner Jeff Maddox. Formerly with Clifford Chance, Maddox says the Wall Street and Magic Circle firms would happily exchange their key corporate clients for more work from the key investment bank clients.
In contrast, Jones Day concentrates on providing full service for many Fortune 500 companies and has historically acted for US multinationals investing in China but is now targeting PRC multinationals doing outbound activity.
"If you're only acting for the investment banks in Hong Kong it's not very lucrative work," says Maddox. "Underwriting work is now viewed as a loss leader, with the banks tough on fees and not particularly loyal."
But Terry argues that fee pressure from clients has always been substantial, with legal costs a pass through for the investment banks. And many Chinese companies that are new to the market are not used to the concept of paying seven figures for legal advice.
"Loyalty is a function of performance," says Terry. "With many of the top law firms under pressure from London and New York to enhance Asian profitability, they are seeking to pick and choose the work they do and discharge it with fewer staff resulting in uneven performance and uneven service."
And that is a dangerous game to play in a market like Hong Kong, which does not enjoy the sort of client loyalties witnessed in London or New York. "To a degree the global relationships are considered in Asia and to a degree they're not considered," says one lawyer from a US investment bank. "We obviously have an eye on the New York relationships, but we don't have the luxury of New York."
With Hong Kong a much smaller legal market than either London or New York, investment bank relationships evolve and change on a much quicker scale. And that keeps things on a level playing field for those law firms targeting such work. ALB
