Washington Post
NEW YORK, Oct. 22 -- China's Citic Securities would acquire up to a 9.9 percent stake in Bear Stearns under a joint venture that marks the first time an entity controlled by the Beijing government has obtained a significant stake in a major Wall Street investment bank.
The deal announced yesterday also would give beleaguered Bear Stearns, whose stock price is down 28 percent for the year, mostly from losses in mortgage-related securities, a foothold in China's rapidly growing financial-services sector.
The two firms would invest about $1 billion in each other, sell financial products in China and start a Hong Kong-based joint venture offering financial services in other Asian markets.
The deal underscores China's growing clout in global finance and the desire among Western financiers to gain entry to China. More such deals are likely to take place as China uses its massive foreign exchange reserves to invest in assets overseas, some analysts said. While many of those investments have been in the energy and natural-resources sectors, Chinese stakes in financial firms should continue to grow as China looks for ways to diversify its overseas portfolio, the analysts said.
In May, the Chinese government paid $3 billion for a 9.7 percent stake in the initial public offering of shares in the private-equity firm Blackstone Group. In July, the China Development Bank agreed to buy a minority stake in the British bank Barclays.
"Citic invests in energy and other sectors, but this is a major step so far in investing in the financial services area," said Wenran Jiang, director of the China Institute at the University of Alberta in Canada. "The simple fact is that there is a lot of cash flowing around. The basic law when you have so much surplus capital is just to go diversify and look into the big guys overseas."
On Capitol Hill, reaction was relatively mild. Experts said they did not see many regulatory hurdles to the deal, which is subject to approval in the United States and China.
Most noted that Citic's investment would be far from a controlling stake, making the deal much less a political target than the $18 billion attempt by a state-run Chinese energy firm to take over the U.S. oil company Unocal in 2005. That effort fell apart after Congress threatened to block the deal and China National Offshore Oil withdrew its $18.5 billion offer.
Sen. Charles E. Schumer (D-N.Y.), who expressed concern last month over a minority stake of 19.9 percent in the Nasdaq Stock Market by a Dubai state-controlled investment firm, said yesterday that the Chinese investment "helps keep Bear Stearns independent," which he said was "good for New York and America."
Some analysts said the Chinese investment in Bear Stearns would make it difficult for another firm to take over the Wall Street firm. Still, the analysts said, Chinese entities looking to expand abroad are aware of the sensitivities involved and said Citic's approach to Bear Stearns apparently reflects lessons learned from the Unocal failure.
"The Chinese are . . . saying, 'Well, let's do this in a fashion that's not as offensive, perceived to be less threatening,' " Jiang said. "Nevertheless, China has the ambitions. China has the capabilities of a global player. . . . I think you'll see Chinese are waiting for Western reaction on this."
By teaming up with a leading bank in China, analysts said, the deal would give Bear Stearns some access to Citic's book of customers and a chance to catch up with its rivals in China. It would allow Citic, whose main business is in equity underwriting, to tap into Bear Stearns's expertise in sophisticated debt instruments and other financial products.
"This groundbreaking alliance will give Bear Stearns a unique footprint in one of the world's fastest-growing economies through a strategic partnership with a premier market leader," said James E. Cayne, Bear's chairman and chief executive.
Citic Group, parent of Citic Securities, is a state-owned investment firm established in 1979 when Deng Xiaoping's government sought to attract foreign capital.
The growth of Citic Securities, whose market capitalization has quadrupled to more than $50 billion this year, reflects China's emergence as a major force in the global economy and as the ultimate potential market for foreign firms with merchandise or services to sell.
Under the agreement, Citic would invest about $1 billion in Bear Stearns by buying preferred securities that would convert to about 6 percent of the U.S. firm's shares. The deal includes options under which Citic could increase its stake to 9.9 percent.
It also calls for Bear Stearns to acquire a similar stake in Citic through a six-year convertible-debt security. Bear would also have options to buy additional shares.
Bear Stearns and Citic also would form a Hong Kong company that would offer capital-market services in Asia, including cross-border mergers and acquisitions and international offerings of Chinese companies. Each party would have a 50 percent stake in the joint venture.
Richard X. Bove, a financial-services analyst at Punk, Ziegel, said the partnership, while a good move for Bear Stearns, falls short of what investors had hoped for as Bear shares were pummeled and takeover speculation swirled in recent months.
"It's a bunt. It's not a grand slam home run," Bove said. "People are somewhat disappointed because they wanted new capital coming in. They wanted a takeover, which is less likely now."
"If the key problems are that the key mortgage business is shrinking, that the derivatives business is shrinking and the hedge fund business is shrinking, this deal does nothing to turn those things around," he said.
John Heine, a spokesman at the Securities and Exchange Commission, said the agency did not have immediate comment on the deal. Because Bear Stearns stock is publicly traded on a U.S. stock exchange, its disclosures and financial statements are reviewed by U.S. securities regulators. Bear Stearns stock closed Monday at $117.85, up 1.44, or 1.2 percent, on the New York Stock Exchange.
Staff writer Carrie Johnson and staff researcher Richard Drezen contributed to this report.