SOURCE: The Boston Consulting Group

September 18, 2008 00:01 ET

Surge of Cross-Border M&A Deals by Chinese Banks Is Creating Opportunities for Foreign Banks, Says Report by The Boston Consulting Group

Chinese Banks Have Good Reason to Venture Abroad but Face a Range of Challenges as They Pursue Cross-Border Deals

BOSTON, MA--(Marketwire - September 18, 2008) - Chinese banks have been pursuing larger, more ambitious M&A deals. Many deals have involved taking stakes in foreign institutions, according to a report by The Boston Consulting Group (BCG). The report, titled "Venturing Abroad: Chinese Banks and Cross-Border M&A," is being released today.

From 1993 through 2005, Chinese banks made an average of about one cross-border acquisition per year. Most deals were valued at under $20 million. Since then, Chinese banks have made 11 cross-border M&A deals. Five of these were worth at least $1 billion.

"Chinese banks face a range of challenges as they pursue overseas M&A deals," said coauthor Tjun Tang, a partner in BCG's Hong King office, "but they are moving inexorably toward a more international profile. Their size alone makes them capable of influencing markets, particularly if they can harness the momentum of China's global challengers -- dynamic companies that are heading abroad.

"To build strong international positions, however, Chinese banks still need to develop core skills and capabilities," Tang said. "M&A deals can help accelerate this process. In the meantime, the surge of cross-border M&A by Chinese banks is likely to be more of an opportunity than a threat to foreign banks."

Cash-rich Chinese banks can help foreign banks weather the current financial crisis. Several Western banks have already courted foreign investors. Foreign banks could also look for opportunities to provide Chinese banks with the presence to serve their globalizing customer base. "Chinese banks want true partnerships," said coauthor Holger Michaelis, a partner in BCG's Beijing office. "They are not just looking for ways to spend their capital. They're searching for ways to acquire new capabilities, enhance their offerings, and leverage their emerging-markets skills."

In addition, Western banks, particularly those that have been hit hard by the crisis, might consider selling business lines as a way to free up capital and refocus on core objectives. "Chinese banks have both the capital and the incentive to make such purchases," Michaelis said. "They are not direct competitors -- at least not yet -- and therefore present a better option for banks seeking to divest business lines."

The Challenges of Cross-Border M&A

Growth is the common denominator for cross-border M&A, but the report also cites other reasons for these deals, such as deploying excess funding, going global, acquiring capabilities, and diversifying the business.

"Chinese banks have good reason to pursue cross-border deals," said coauthor Frankie Leung, a partner reporting BCG's Hong Kong office. "But some investors and analysts believe they should concentrate on opportunities closer to home, given the country's strong growth. They've also questioned whether Chinese banks have a clear strategy -- along with the skills and resources -- for venturing abroad."

The report is the result of an in-depth study that involved extensive interviews with leading Chinese banks and regulatory officials -- along with financial investors, investment banks, and other market participants, both inside and outside China.

"Mergers and acquisitions are inherently risky and complex," Leung said. "Cross-border deals tend to pose even great challenges than domestic deals." The report describes the steps that Chinese banks can take to build and execute a strategy for cross-border M&A, beginning with a clear logic that spells out the role of international expansion in a bank's overall strategy and vision.

To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.