Then there was Ren
The bank wasn’t finished yet. Next in line was Margaret Ren, head of China at Bear Stearns. Ren is set in the same mould as Leung – a hunter of big deals, impeccably connected, and nobody seems to be able to profile her in print without using the word ‘charming’ – but is perhaps even better connected on the mainland, being mainland-born and the daughter-in-law of former Communist party secretary general Zhao Ziyang. (What few critics she has suggest she has traded on that name, but one would assume there comes a point when it is no longer an asset at all.) She is also smart, with a senior degree from MIT.
Ren declined an interview for this piece having only officially started at Salomon a few days before it was written, and wanted her face kept out of the article (hence the rear view on the cover). But she is perhaps respected most not so much for the deals she brought in – highlights being IPOs for Guangshen Railway, Beijing Yanhua Petrochemical, Yangzhou Coal, and the advisory or bookrunner roles on several major capital raisings for China Telecom (later China Mobile) – as the fact that she brought them in for Bear Stearns. Nothing wrong with Bear Stearns: in many areas it is a fine institution. But none there would deny that in China business, compared to the other US and European houses, it is spectacularly outgunned. When it got the Guangshen Railway mandate, people noted at the time, Bear Stearns didn’t even have a railway analyst.
Johnny Chan, now CEO of Techpacific.com, was managing director and head of equity capital markets at Bear Stearns at the time that Ren was originating these transactions, and recalls the difficulty of working from such an operation. “We were tiny. Had it not been for Margaret, it would have been tough to get those deals. It’s hard for an operation like that to compete in the large privatization mandates, because it was a niche business for Bear Stearns, and Margaret was absolutely key to getting them that business. She must have had offers every year.” She certainly had at least one – from Francis Leung himself, back at Peregrine, in the mid-90s – which begs the question why she stayed so long. “I like to think we were pretty good people to work with,” says Chan. “She was important and the firm knew it, and she was treated with a lot of respect. Her recommendations carried a lot of weight, unlike in larger firms where the product guys make the larger decisions on what to do or not to do. That’s very helpful for an originator.” Chan calls her: “The best China banker I ever came across.” (We should add, for transparency’s sake, that Techpacific.com’s IPO was led by BNP Paribas Peregrine – under Francis Leung.)
Leung thinks Salomon was talking to Ren even before it started talking to him, although it wasn’t until early October this year that she officially started. Once again, Marwah was at the centre of it all. Unsurprisingly he is a fan. “Her analysis of the China market, particularly in regard to the largest corporations in China; her capacity to analyse what is best for those corporations, for the CEOs within them; how they might best interact with the global capital markets, and what might hold them back; her capacity to analyse all of those disparate forces is totally unique.” He calls her “brilliantly commercial”. And the fee for Ren’s services? Once more this is unconfirmed, but informed market sources put the figure at between US$5.25-5.5 million annually with a multiple-year guarantee.
Both of these appointments went to the top, through Salomon CEO Michael Carpenter in New York, and on as high as Sandy Weill and Robert Rubin – the former Goldman Sachs co-chairman and Secretary of the Treasury under the Clinton administration, who now holds the title Chairman of the Executive Committee for Citigroup. So Salomon has spent big, and got powerful people, who the market respects. The next question is: what does it do with them?
The integration question
The first question that occurs to many in the market is that Leung and Ren are two people cut from the same cloth, and that therefore they will clash. They are both known first and foremost for their connections; they are rainmakers, people entrusted to bring in the big deals. Is there room for two stars?
Leung’s own thoughts on this can be read in the box on p18, but in essence the two roles do appear to be distinct. Ren’s is easier to define: she will be head of China investment banking, reporting to Asia investment banking head Sanjiv Misra, and her role, in the main, is to get Salomon back on to the big privatizations. She is also vice-chairperson for Asia, whatever that means. Leung’s is broader, both in terms of product and geography: he will cover not only the mainland but Hong Kong, Taiwan, and anywhere with large populations of Chinese entrepreneurs, and he will focus in particular on the strategic matter of what Salomon and Citigroup can do in the Chinese domestic markets. He will spend a fair amount of time on private clients, and has spoken more than once of his wish to find a mainland Li Ka Shing. (His title suggests a broader responsibility but it seems clear that Salomon’s weaknesses are in Greater China, and that is where he will at least start out; besides, Bill Mills retains overall control for Asia.)
If that delineation is correct, then in a way Ren’s is the most high-pressure situation. Citigroup is clearly correct to assume that there is more to China business than big privatization mandates. But to external eyes, the rehabilitation of Salomon Smith Barney in China will only be complete when its name appears at top left on the tombstones for a deal on the scale of Petrochina, Unicom, Sinopec or – let’s face it – CNOOC. The sheer scale of work that needs to go in to a transaction of this size, which is often dependent on the restructuring of an entire industry, means that even in the best of circumstances it will be a while before Salomon can run such a deal. It knows this. “I don’t see it as: ‘we have hired two rainmakers, and all of a sudden in three months we are going to get a big privatization mandate.’ I don’t believe it works that way,” says Mills. But although Mills says the bank “has not imposed any kind of deadlines or expectations”, presumably head office is going to want a return on those salaries sooner rather than later. “Hopefully within 12 to 24 months we will see material progress in terms of our profile and position in China,” says Mills.
Another question is whether guanxi, and the impeccable connections these two people bring with them, is sufficient to make a difference. (See box: Is Guanxi enough?).
A question of compliance
The next question is whether Leung, many of whose deals have been controversial, will have trouble fitting in to the strict compliance environment one would expect in a US bank – particularly Citibank. Peregrine was always seen as playing fast and loose, reveling in its audacity, and many observers saw the BNP Paribas Peregrine team – containing 90% of the original Peregrine equity team at one stage – as doing much the same under a different name. Mills says: “There is nothing that Francis has been involved in or asked us to consider at SSB that wouldn’t fit under the description of ordinary business we undertake on a day to day basis. There doesn’t appear to be much of a difference in compliance culture from a European bank operating in Asia and what we have to go through as a US firm.” Leung says much the same, suggesting the bigger jump in compliance came with his move to BNP; he also notes that every major player in the field is also subject to a US compliance culture (see box: Leung on Leung). Time will tell if they’re right or just optimistic.
But perhaps we miss the point if we paint Citigroup as an organization curtailed by US regulation. In fact, among those with experience of US banks, some see Salomon as something of a maverick institution in its own right. “It is just the wildest firm with the strangest characters, and it’s the most colourful,” says a former employee, who remembers it fondly and appears to be trying to pay it a compliment, albeit a rather double-edged one. “The nice thing about Salomon is, you never know where they are going to succeed or fail. Like, they take this deal, Siam Commercial Bank, which the major banks passed on. They ended up raising a couple of billion dollars and making, like, US$40-50 million dollars in fees. When they were, to be frank, not the first choice or even the sixth choice. [The deal in question was a much-feted US$870 million-equivalent, baht-denominated share offering in April 1999, and this fee estimate has not been confirmed.] And then they win a very prestigious deal like CNOOC, and f**k it up completely, and get screwed up in China.” Does he remember Salomon as well-managed? “No. But it was fun! Salomons is always the unpredictable monster. They would always either exceed their expectations, or completely fail. They would never just get the deal done. It was always a drama.” It’s a pattern he attributes to the relative strength of traders at Salomon, as opposed to investment bankers or even the back office at other US institutions, and he traces it back to unlikely successes for PLDT and the even more unlikely failure for Indian telco VSNL, which earned the nickname, Very Sorry No Listing. But that’s perhaps going back too far to be relevant; more pertinent today is the role of the combined bank in the Hynix deal.
Hynix warrants a whole other article (you can find a Deal Mechanic feature, written in July, on the deal on our web site under the Deal Diary section for more details), but in essence it involved the restructuring through a series of loans, notes and a GDR issue of the debts of Korea’s badly flagging semiconductor manufacturer, a company so powerful it has at times accounted for 5% of the nation’s GDP. The transaction is seen to have sullied Salomon’s reputation, at least with institutional investors, since it plunged as much as 80% after launch, and has been controversial in the US because several senators argue it contravenes Korea’s obligations under WTO. But on a more positive note, it did show the two sides of the bank working together – Citibank using its muscle to reschedule debt with loans and convertible notes, and Salomon providing the nouse to get a US$1.25 billion GDR away thereafter. And in fact, some competitors are not as negative about it as one would expect, seeing behind it a strategic gamble. “Nobody else would have touched the deal – others were approached but the US investment banks did not come in,” says someone at another major bank. “We ran for the hills. But they did it because if they pulled it off it would boost their standing in Asia’s capital markets. And, well, it did and it didn’t; there are institutional investors that will never speak to them again, but the Korean government is delighted.”
This gives us two lessons: one, that whatever we think of the compliance-related conservatism of US banks (and particularly those part owned by a commercial/consumer bank), Salomon is still willing and able to take risks, successful or otherwise; and two, it does appear that it will be able to leverage the Citibank balance sheet.
That is vital, and it is the single biggest tool Salomon has at its disposal to get back in to China. Citibank will celebrate its centenary this year in China and is hugely connected. Think of the behind-the-scenes manoeuvering that must have gone on in order for Robert Rubin to introduce George Bush to the APEC summit in Shanghai last month, and you get an idea how connected. The banks that have been successful in China in recent years have flown their top brass over several times a year, and we can expect to see a lot more of the likes of Rubin, Carpenter and Weill, possibly even for a board meeting on the mainland. Salomon is launching a campaign of symbols to regain China, one of Weill’s stated priorities for the bank, and this is all a part of it.