Bear in a China Shop

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Not to miss the ‘invest in China’ boat, yesterday, Bear Stearns and Citic Securities announced a co-investment partnership agreement. If everything is approved by the regulators, which it likely will be, Bear, the darling of the CDO market, will invest US$1B in the Chinese brokerage, which will convert to a 2% stake over 6 years with the option to increase that to 7%. Conversely, Citic will invest the same in Bear, which will convert to 6% stake in Bear over 40 years, and will have the option to increase this stake to 9.9%. Most of the non-Chinese operations will likely be a co-branded operation and it’s yet unclear what the Chinese operation will look like.

Actually this is a great move for both companies. Questions of % ownership aside, the deal gives Bear, traditionally a very US-centric organisation, access to the growing Asian market. This not only presents new sources of revenue, but helps spread the risk away from Bear’s bread and butter US fixed income focus, something that Bear has been under intense fire over in the past few months.

Citic essentially gains a great (although slightly tarnished) brand in the industry with a 80+ year history. Although Citic has operations in most of Asia, the Bear Stearns brand will help them really solidify their position as a serious player. More importantly, the deal gives Citic a great connection into US markets for Asian companies either looking to raise funding or indeed enter the US market.

Typical in this sort of deal and reminiscent of some of my previous blogs, it’s unclear what influence, if any, Bear will have on Citic’s China operations. Essentially Morgan Stanley, who was one of the first i-banks to JV (joint venture) in China in 1995, has become a passive investor in its dealings with China International Capital Corporation (CICC) and the future of Goldman’s venture with Gao Hua is now up in the air due to one of the founders of the deal, Fang Fenglei, leaving to setup his own PE fund.

It becomes a question of: do I want to invest in a market/partner where I may not have complete control, but still take advantage of the market or not invest and lose out on the market completely?

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