Law firms in Hong Kong are preparing themselves for a series of family owned bank acquisitions from mainland banks, following the recent and unexpected acquisition of Wing Lung Bank (WLB) from China Merchants Bank (CMB).

For the past 75 years, WLB had been considered a business built on heritage and family. When it came to M&A it seemed uninterested, but that changed after CMB made a US$4bn bid - an offer too good to refuse. Clifford Chance acted for Wu Jieh Yee, the most significant 28.22% shareholder in WLB, advising on risk exposure, liabilities and breach of warranty.

Amy Lo, a partner at the firm, says that initially her clients did not want to sell, but they became concerned that they could become marginalised and later changed their minds. "It was interesting because we had to negotiate, but it was hard getting the buyers to accept it. Our clients were quite concerned about risk exposure after selling. That was the most difficult [thing]... but I think they're quite happy with the outcome," she says.

It was a similar case for Freshfields Bruckhaus Deringer, which acted for the other 24.9% joint stakeholders, Wu Yee Sun and Yee Hong. Partner Kay Ian Ng says that although his clients were hesitant to sell, they realised that more capital was needed to keep the bank growing and thus changed their mind.

"It wasn't a light decision to make. For our client, it was his father's generation that established the bank and put him in a difficult situation. But, in the end, he decided it was the best for the bank to sell," says Ng.

DLA Piper advised CMB on the bidding and acquisition of WLB. Mabel Lui, one of the lead partners on a deal team which included Dr Liu Wei and Jeffrey Mak, considers the transaction the largest banking acquisition since the 2001 merger of DBS Bank with Dao Heng Bank.

 "Compared to other bidders, CMB had to overcome more regulatory hurdles in order to expand its business via an overseas M&A. Our DLA Piper teams across different jurisdictions worked to provide integrated advice to CMB as Wing Lung Bank has branches in the US, the Cayman Islands and in Mainland China," says Liu. Eugina Chan, a partner at Deacons, acted for Wing Lung Bank. She says there were many complications in the sale, particularly due to the short timeframe.

PRC banks prepare to pounce

The sale of WLB has triggered market speculation that there could be more acquisitions of Hong Kong banks. First-tier PRC investment banks and insurance companies have shown interest in acquiring the four remaining family owned banks.

According to Lo, most potential buyers are first-tier PRC banks and they want to know more about the Hong Kong banks, how to give them an incentive to sell and the best way to increase their own stake.
Lo says the remaining Hong Kong banks that could become takeover targets include Chong Hing Bank, Dah Sing Bank, Wing Hang Bank and Shanghai Commercial.

"Some of the PRC banks interested in acquiring could be the Industrial and Commercial Bank of China (ICBC) or China Construction Bank (CCB), since they're among those that are trying to expand. The Bank of China (BOC) would probably not expand, as it already has an influence and strong foothold in Hong Kong. You'll have at least three big PRC banks still looking for targets," says Ng.

Lo says that some PRC banks do not have a strong financial network in Hong Kong and want to change that. WLB was a particularly attractive buy because the family had a controlling stake, while other banks had more diverse shareholdings.

It would not surprise Lo if all of the remaining family banks were auctioned off within the next two or three years. "At the end of the day, they need to do something - otherwise they'll be marginalised. Unless they have financial backing, they'll find it hard to go solo," she says.

DLA Piper believes there is an emerging trend that second-tier PRC banks are beginning to conduct overseas M&A. This is especially the case since the central government announced its 'Going Abroad' policy, encouraging PRC businesses to expand their operations overseas. "We expect more acquirers to come from Mainland China in the next 12 months as Chinese companies across various sectors continue to pursue expansion opportunities offshore," says Lui.

Deacons expects that significant capital flows will come to Hong Kong in the next five to 10 years. Chan says the main drive behind this is that Hong Kong's financial system and capital markets are considered among the best in the world. Mainland banks offer existing infrastructure that is compliant with standards in the given country. "Another great advantage is staff of a Hong Kong bank, who are typically bilingual, will share the language and cultural values of those in the Chinese bank to a large extent. This can greatly enhance the process of integration following the M&A. Therefore, local Hong Kong banks have become the preferable targets for PRC banks pursuing overseas expansion."

IPOs: good building blocks

Freshfields claims to have helped nearly all of the PRC banks complete their IPOs in other regions. Ng believes this is a good first step in creating a working relationship with them, which may bring larger transactions later on.

Although many PRC banks have listed on foreign stock exchanges, Ng says this is not necessary if a bank only wants to carry out M&A in another market. He gave the example of ICBC's acquisitions in Macau and Africa, where the PRC bank did not list in either country.

"It doesn't necessarily give an M&A advantage to list on that particular country's stock exchange. There are so many potential targets, but it doesn't mean that you have to list in that country to buy them," says Ng.

Lo believes that having a foreign market presence, namely a bank licence or recognition, is more useful. This, in addition to aggressive spending, can increase a bank's chances of making an acquisition.

For now, consolidation can be expected across Hong Kong's banking, insurance could capitalise on this, expanding by using Hong Kong as a hub to invest in other regions.

DLA Piper claims that Hong Kong banks may find acquisition by a Mainland China-listed PRC bank attractive. Jeffrey Mak, another DLA lead partner on the deal, says a PRC bank that acquires a Hong Kong bank can strengthen its ability to expand overseas - the Hong Kong bank can and telecommunication sectors. Chan says market consolidation has already begun in telecommunications, giving the example of PCCW's acquisition of SUNDAY.

"If the right opportunities arise, there may be some deals. But we don't see a distress situation likely to develop in Hong Kong and, given that many may want an entry ticket to this market, it's likely that vendors will be looking for a reasonable price." ALB