Cover Story: Confronting the Merger Monkey

Jeffrey J.L. Koo Jr., then CEO (and now chairman) of the Chinatrust Commerical Bank, sat in front of a crowd of reporters one afternoon late last year and told them he had a big announcement to make, but they'd have to wait. When Jeff Junior talks, people listen, and so the audience waited impatiently for more than an hour and a half while he chatted with reporters, occasionally glancing at his watch as if hinting that his major pronouncement had an embargo.

 

When he finally got behind the microphone -- and announced that Chinatrust was pleased to announce the launch of a new credit card -- the journalists groaned with disappointment at the letdown. Rumors had been rife for weeks that a major merger was in the cards, and a new credit card was not the headline news they'd been hoping for.

These days, more than a year later, giving reporters and investors anything less than a new acquisition continues to come as a disappointment. With 51 domestic banks in operation, making Taiwan still seriously "over-banked," market watchers are so thirsty for merger news that they start to see visions, like a mirage in the desert. But thankfully for them, and for the wider interests of the industry, that thirst has been quenched a lot more lately than during the barren times of just a few years ago.

The inauguration of the institution of financial holding companies, plus wider deregulation, has opened up the market to the possibilities of all sorts of couplings. During the past 18 months the momentum has gathered pace, starting with Fubon Financial's purchase of Taipei Bank. The owner of Fubon Bank and Fubon Insurance did a share-swap deal in August last year to acquire Taipei Bank from the Taipei City government. Among the attractions for Fubon was Taipei Bank's strong Taipei branch network and its key customer, the city government. As a result of the merger, two Taipei Bank appointees will sit on the merged entity's 11-member board. In the longer-term, Fubon is looking to continue leveraging the extra branches to sell its lucrative insurance products.

With the Fubon acquisition of Taipei Bank out of the way, the path was clear for Cathay Financial to pick up United World Chinese Commercial Bank (UWCCB). Fubon had also been the front runner for UWCCB, but two weeks after the Taipei Bank deal was announced, Cathay United Bank was formed.

At the very end of last year, yet another merger was announced, with Chiao Tung Financial Holding buying International Commercial Bank of China (ICBC) and Chung Kuo Insurance. A day later, from January 1 this year, CTB financial became known as Mega Financial. Since then, Mega has tried to live up to its name, becoming a constant subject of M&A rumors.

In July this year, those reporters on the Chinatrust beat finally got the opportunity to write up some merger news when Chinatrust acquired Grand Commercial Bank in a cash and share deal, and propelling it up the banking leader board to become the largest privately owned bank and the second-largest domestic bank (behind Bank of Taiwan).

As attention now turns to the prospects for 2004, First Financial is considered the most likely to be betrothed in the new year. The company, 28% government-owned, has taken on Pricewaterhouse Coopers as an adviser and hasn't been shy about its window shopping. Sources who have seen First Financial's shopping list say that the company wants to strengthen its fee-based income and improve its consumer banking division.

A tie-up with Mega had once been a possibility but has since receded. Among the other names linked to First Financial is Taishin International Bank, which itself merged with Dah An Commercial Bank last year.


[Box] What Needs to be Done

After a long career with Citibank, Eric Chen last year became president and CEO of the Chinatrust Commercial Bank, one of Taiwan's leading private financial institutions. In October this year, he was invited to address the Taiwan Business Alliance conference for foreign investors on the subject of Taiwan's capital markets.

In the first section of those remarks, Chen noted Taiwan's strengths underpinning its capital markets:

* A large, active stock market with total market capitalization of US$360 billion, third in Asia outside Japan, but with the highest turnover in the region. Over 1,000 companies are listed on two exchanges. Since1998, foreign ownership in the Taiwan equity market jumped from 4% to 23.6%.

* In the bond market, outstanding funds doubled in the past five years to reach US$108 billion. Corporate bond and financial debenture issuances now account for 30% of the local bond market.

* In the first three quarters of 2003, 55 Taiwan listed companies raised US$11.5 billion in the international market, accounting for 79% of the total ex-Japan Asian cross-border fundraising.

* Foreign portfolio investment in Taiwan totals US$85 billion. At 227 companies, foreign investors hold more than 10% of the shares.

* Technology companies account for 56% of market capitalization and 57% of market turnover. There are 501 technology companies listed on the Taiwan exchanges, making Taiwan one of the most important IT countries in the world.

* 61% of Taiwan-listed companies invest in China for production or marketing -- the highest degree of China connection in the world aside from Hong Kong. Almost 70,000 Taiwanese manufacturers operate in China, and the Taiwanese investment there is estimated to total between US$50 billion and US$100 billion.

In the second section of his talk, excerpted below, Chen outlined his views on the steps necessary to make Taiwan a first-class capital market.

Our government is taking significant steps to open up the local markets. This month, the 12-year-old Qualified Foreign Institutional Investors restriction was lifted. We understand that many other rules and regulations are under review in order to facilitate foreign investments into this country. While we welcome and applaud such initiatives, we also strongly believe that further, broader and faster deregulation is critical to the development of Taiwan markets and hence the future of the country.

A first-class market requires first-class operators. However, low profitability and volatile earnings restrict the growth of securities houses, key operators in this market. Current underwriting rules put limitations on stock and bond underwriters to compete in their distribution capabilities. Underwriters rely on their capital size to weather the risks. The result is low return on capital and high volatility in earning. We heard that our government is working on amending the rules to shorten the underwriting cycle and therefore reducing underwriters' risks. This is a good starting point.

Another similar example is the pricing cap imposed on brokerage commission. In Taiwan, brokers can charge no more than 14.25 basis point for a transaction. No quality service can be provided at this price. As a result, brokers encourage their investors, oftentimes individuals, to trade on every news release. 14.25 basis points is too low to allow differentiation in services. We request an immediate lifting of the pricing cap.

Deputy Minister Yang Tze-kaing has declared that the Ministry of Finance is working to transform Taiwanese securities houses and banks into true investment banks. Further relaxation of the relationship with China is a necessary step to make that vision come true.

A first-class market requires first-class issuers. We support our government's effort to allow overseas Taiwanese companies to list on the Taiwan exchanges. But time is slipping away. Thirteen Taiwanese companies have already listed on the Hong Kong exchange. We have to catch up. Privatization of the state-owned enterprises adds a slew of important companies to investors' list of choices. Efforts to carry out the privatization plan must be continued and re-enforced.

International investors prefer to communicate in language they are familiar with. We should therefore adopt international accounting standards, disclosure requirements, and corporate governance practices to facilitate communication with the international investors. We also wish the long-waited RTC Amendment Bill will receive the blessings of legislators in this congressional session, so that the NPL-dragged banking industry can speed up its cleanup actions.

A first-class market requires first-class investors. Pension funds are the cornerstone of a stable market. We should re-examine the current pension-fund system. Allowing the private sector to directly manage part of the pool of pension funds would be a good first step. We understand that taxation is a sensitive issue, especially in an election year. But major overhaul of the current tax system is unavoidable and necessary if we want to modernize our market and bring back overseas Taiwanese money. Domestic investors need to know that risk and return balance the market. The government should gradually withdraw from intervening in the market. Let the players decide the game. And let the players learn the game.

Last but not least, a first-class market requires first-class regulators. We should not re-invent the wheel. The world is becoming smaller every day. Always use international standards. Regulators should understand there is competition out there. Investors can pass by our markets and issuers can list somewhere else if they don't receive quality supervision or service. Nowadays, people view government no differently from what they expect from a private enterprise. Effectiveness and efficiency of regulatory bodies are critical to a market likes ours.

Taiwan is a unique and powerful market. Taiwan is sitting next to the biggest opportunity that globalization has created. We can choose to ignore it or we can choose to leverage it. But globalization is here to stay. A few weeks ago, I met a well-known scholar and a friend of Taiwan, Lester Thurow. I would like to use the title of his new book, "Fortune Favors the Bold," to close my remarks. Yes, fortune favors the bold. Let's be bold.

Let's stride [forward] and embrace the challenges.