Tough rules for beauty contest
Bank of Shanghai has been holding a 'beauty contest' over the past few weeks, with more than a dozen investment banks vying to underwrite its US$2 billion Hong Kong listing, expected early next year.
But the deal comes with a twist. The mid-size state-controlled bank has given potential underwriters a detailed list of 62 items it wants as a quid pro quo for a piece of the action, people familiar with the details said.
Among other things, the bank wants complimentary assistance for everything from upgrading its information technology to improving its trading systems to building its wealth management business. It's the kind of co-operation normally expected from a strategic investor rather than an underwriter of an initial public offering (IPO) of shares. And bankers are worried that if they agree to the demands - some of which they consider costly and potentially giving away some of their competitive edge - it could set a precedent for other mainland companies aiming to list.
'Since the market is really bad, competition has become extremely tough this year. The fact is every investment bank wants to get a major IPO deal like Bank of Shanghai, and that makes Bank of Shanghai really feel like God,' one of the people said.
Most of the demands on what's being called the '62-item list' have been carefully matched with specific banks' expertise. It's a bold precondition for what in the boom IPO years would have been considered a relatively small listing.
Most bankers, though, dare not complain, at least openly, fearing it could damage their chances of participating in the listing or harm business opportunities in the future.
Bank of Shanghai, in which HSBC holds an 8 per cent stake, aims to select four investment banks to help it underwrite its planned IPO. After the first round of negotiations, four banks - Morgan Stanley, JPMorgan, UBS and Hong Kong-based ICBC International - appear to be the front runners to win the deal in a contest that will be decided in the coming months, the people said.
Other candidates include Barclays Capital, Goldman Sachs and HSBC, which continue to lobby the top management of Bank of Shanghai to give them a role in the IPO, the people said. Despite the shareholder tie, the Shanghai bank doesn't want HSBC to have a role in the IPO, they said. Relations between the two have soured in recent years, particularly after HSBC in 2004 became a strategic partner and a 20 per cent shareholder in Bank of Shanghai's bigger rival, Bank of Communications, which is also based in Shanghai.
Even for the four front runners, winning the IPO deal will not necessarily translate into big profits, because of the cost of the quid pro quos.
For example, part of the reason Bank of Shanghai would like UBS, which is well known for its private banking business, to be an underwriter is it wants UBS to send a team of specialists to work at Bank of Shanghai for several months, helping improve the bank's wealth management business, one person said. He said this requirement was on the list.
The implication from Bank of Shanghai, he said, is 'if you don't send your staff here to work for us for several months, you won't get the IPO deal.
'That is a precondition that you have to agree to if you want to get into the next round of negotiations.'
While the UBS staff are based at Bank of Shanghai, the Swiss bank would be expected to continue to pay their salaries as well as meet expenses such as flights and hotels, the person said. He said the bill for UBS could reach US$1 million.
Typically, investment banks charge their IPO clients underwriting fees of between 1 per cent and 3 per cent of the amount raised. Usually, the bigger the IPO, the lower the rate of fees. If a client appoints more than one underwriter, then the fees will be divided, and a lead underwriter will get relatively more than the others.
Bank of Shanghai hasn't made its IPO size public yet, but analysts expect it to raise about US$2 billion.
Besides UBS' private banking expertise, the bank is also keen to learn about risk control and asset management from Wall Street banks such as JPMorgan and Goldman Sachs, the people said.
The only exception to this tough 'beauty contest' for Bank of Shanghai's Hong Kong IPO is ICBC International, which isn't expected to contribute anything extra but will be included by virtue of its ties to the government. ICBC International's parent company is Beijing-based Industrial and Commercial Bank of China, one of the 'big four' state lenders, which raised US$21 billion through an IPO in Hong Kong and Shanghai in 2006 in headier days.
Despite its front-runner status, people close to UBS said the Swiss bank had not decided whether to accept the Shanghai bank's conditions, mainly out of cost concerns. If UBS walks away, Goldman Sachs would most likely win the deal, the people said. UBS and Goldman declined to comment.
For one banker, it's just a sign of the times. When markets were hot, he said, 'investment bankers were a bit picky about what kind of clients and deals they wanted to take, because there were so many companies that wanted to go for an IPO, and the market was just good enough to take almost anything'.
Number of listings on the Hong Kong stock exchange in this year's first half. In the same period last year, there were 48 IPOs