ICBC’s+R37bn+tie-up+with+Standard+Bank,+Tim+Cohen,+B+Day



=ICBC’s R37bn tie-up with Standard Bank=

Tim Cohen, Monday Column, Business Day, 29 October 2007
//More politics than business//

Industrial and Commercial Bank of China’s (ICBC) R37bn investment in Standard Bank sets the two banks up in an interesting relationship — in the Chinese sense. In some ways the deal is very large but very ordinary — a simple purchase of shares. But from the perspective of the industrial logic of the deal, it’s a bit unusual, because at the macro level it’s a deeply and earnestly political deal.

The way to see this clearly is to compare it with Barclays’ decision to buy 51% of Absa. That was, first and foremost, a business deal. Its character was most obviously demonstrated by the fact that looming large in the minds of Barclays’ management was control. Hence the 51%, against 50% or less.

In general, management of subsidiaries seldom works well by negotiation. It’s hard to drive through synergies and you tend to run into all kinds of problems with confusion of focus and direction. From a business point of view, it makes more sense to hold at least a majority in your subsidiaries, because then at the minimum roles are clear, hierarchies specific and areas of operation can be demarcated precisely.

In theory, the whole company moves forward in unison. The overall direction might be wrong, but at least it’s clear who is at fault, and quite often, what needs to be done. Companies owned by several different blocs, on the other hand, can work well. But they are at the very least in danger of boardroom blow-outs as the different blocs vie and push to get what they want out of their units. Sometimes it is growth, sometimes dividends, sometimes stripping out costs. Companies with several bloc owners often move forward like crabs, first this way, then the next as they get pulled and pushed by the different controlling factions. It’s fun if you like that sort of thing, but it can be very debilitating for staff, confusing for management, and frustrating for shareholders.

But the key aspect of ICBC’s purchase is not the large amount involved — 20%. For South Africans, it’s a substantial chunk of change. It’s also a landmark for foreign investment by a Chinese company. But for the largest bank in the world by market cap, you can’t help wondering why stop at 20%; why not go the whole hog? It seems very politic, almost respectful and cautious. Chinese banks are trading at enormous multiples, and price:earnings ratios of 40 are common. SA’s banks are, by comparison, cheap. If there was a time for the Chinese banks to expand aggressively, it’s now.

In that context, a 20% stake constitutes caution. The overall result of the investment is that the group remains in South African hands, and that does not seem accidental. Much of the announcement uses terminology reminiscent of Codesa: joint councils will be formed, there will be lots of introductions done, and there will generally be a warm and fuzzy relationship between the banks.

It’s almost as though the investment itself is a side issue compared to the plans the two banks have to do business in the future. And this is, of course, what looms large in the minds of ICBC; not control but an avenue into African resource markets.

Neither is it an accident that this strategy dovetails neatly with the Chinese government’s push into Africa. As a nation, China has put its faith in manufactured goods, and African natural resources are consequently a critical component of that push, just as access to developed markets is critical for the Chinese if they want to sell their goods. Control is not the issue; access is the issue.

The political felicity of the deal on the other side is also noteworthy, since the investment takes place just before the African National Congress’ Polokwane conference and underlines at least one foreign country’s confidence in the economy. Yet, there is a limit to how far this argument runs. Yes it’s a significant statement, but its contrived political nature detracts from its impetus.

What does this mean for Standard Bank? In the short term it’s fabulous, because it provides the bank with resources to grow and, more importantly, the mandate to hit the pedal to the metal. The announcement was paired with applications to the Reserve Bank to keep some, or perhaps all, of the money off-shore, which will presumably help in paying for the Nigerian and Argentinian banks in their sights. Longer term, you have to wonder where this will end up.

But because the deal is essentially a mandate to expand, it asks serious questions of the other South African banks. Standard almost got taken over by the then Nedcor, not accidentally shortly after one of the former’s Russian forays went toes up. But now the boot is on the other foot. As emerging markets have regained their growth trajectory, Standard Bank’s adventurousness has paid off, making Nedcor’s solid conservatism seem flat-footed by comparison.

For both Nedbank and FNB, the windows of opportunity are busy closing. Who knows how many other foreign takeovers of local banks the finance ministry will tolerate, but it can’t be many. No country wants its banks largely controlled outside its jurisdiction.

And there is an irony in all this which brings us back to the issue of significant minority stakes.

Old Mutual’s hold over Nedbank doesn’t seem to have encouraged the bank to expand its ambit of operations. At the same time, Sanlam’s decision to sell its majority stake led to Absa being taken over by Barclays. Which all goes to show how interesting a substantial minority stake can become.


 * From: http://www.businessday.co.za/articles/bottomline.aspx?ID=BD4A599329**

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