HSBC is exercising its right to end the purchase agreement reached between its subsidiary, HSBC Asia, and Lone Star on the terms announced on September 3, 2007. It seems clear that Lone Star was not willing to renegotiate the original price tag of $6.3 billion û at least not at a price that was satisfactory to the UK bank.
Sandy Flockhart, chief executive officer at HSBC Asia, said: ôIn light of developments around the world, not least changes in asset values in world markets, we do not believe that it would be in the best interests of shareholders to continue to pursue this acquisition on the terms negotiated last year.ö
The formal agreement ended on July 31, but both sides had agreed not to terminate it at that time. Rather they were to continue to discuss how the deal ômight be taken forwardö û a phrase that was widely interpreted to mean that the two parties intended to haggle over the price. As part of the revised agreement, HSBC and Lone Star were to be allowed to pull out at any time before the deal was approved by KoreaÆs financial regulator, the Financial Services Commission (FSC). The FSC asked HSBC to resubmit its application for approval on August 11, but had yet to grant it.
Paradoxically, likely approval by the FSC might have sent HSBC running, because it might have been forced to pay the original price û despite a 13% fall in KEBÆs share price since the deal was first announced.
The sale of KoreaÆs fifth biggest bank to HSBC had been delayed as the FSC withheld approval due to legal disputes over Lone StarÆs purchase of the bank in 2003 and amid public anger at the terms of that sale.
But in a statement released on July 25, the FSC said that: ôWe will start reviewing the deal as soon as HSBC submits updated documents for the deal to us,ö adding, however that, ôour decision of whether to approve the sale will depend on how legal disputes surrounding the deal will be resolved.ö
This marked a change in the stance from the FSCÆs earlier position that it would only make a decision after all legal disputes involving Lone StarÆs takeover of KEB had been resolved. The regulator believed that, ôwith the deadline for [the agreement] between HSBC and Lone Star nearingàit was necessary to clarify the governmentÆs position on the dealö. The move was widely viewed as positive for HSBCÆs plan to buy the Korean bank.
Nevertheless, the legal issues would still take some time to resolve. Lone Star has been waiting for a Supreme Court ruling over a KEB share price manipulation case after the Seoul appeal court cleared its Korea head Yoo Hoe-won of the charges; and an initial ruling on whether or not the KEB sale to Lone Star was transacted at an artificially low price, allegedly based on misstated financial figures, is pending and, besides, any decision is likely to be appealed.
A sign of HSBCÆs commitment to the deal came in the summer when HSBC's Korea president, Simon Cooper, reached an agreement with the KEB labour union to retain the identity of KEB and guarantee jobs once the takeover was completed. This followed a statement by KEB's chief executive officer, Richard Wacker, at the beginning of July that he hoped that the deadline would be extended if the deal wasnÆt completed by July 31.
Flockart added in ThursdayÆs press release that: ôHSBC remains fully committed to Korea, however, and it is our aim to play a full part in the countryÆs financial services sector. Our focus is now on HSBCÆs existing and growing operations in Korea which we will continue to invest in and developö.
Missed opportunity
But although itÆs possible that HSBC might revive talks with Lone Star in the future, especially if other buyers donÆt surface, its only viable option now seems to be to grow organically.This will be a long process, however, and the failure to reach an agreement with Lone Star will be a serious disappointment for HSBCÆs Korea executives, after it was beaten by Standard Chartered in a battle to buy Korea First Bank in 2005. Market analysts believe that the purchase of KEB was the last chance for HSBC to take a significant foothold into AsiaÆs third largest banking market.
KEB has a strong brand, with 350 local branches, and offers personal finance and high-net-worth-individual services as well as trade and foreign exchange operations. It has strength in depth. Its purchase would have given HSBC, which has just 11 Korean branches, a critical mass. KEB is also the only Korean bank with a meaningful international presence, with operations in North America and throughout Asia as it follows its domestic customers overseas.
And the benefits could have worked both ways, which is always a key consideration when selling the proposal to a sensitive Korean public. With access to HSBCÆs 10,000 offices worldwide, KEB could have become KoreaÆs first genuinely global bank û a tremendous fillip ahead of KoreaÆs ôbig bangö financial sector reforms due early next year.
If HSBC had succeeded in buying a majority stake in KEB, it would have brought an end to the long, controversial saga of the circumstances surrounding Lone Star's acquisition of the bank in 2003. Controversy and prosecutions continue, centred on accusations of stock manipulation and a deflated sale price, in a climate still resentful of foreign raiders having picked up Korean assets at knock-down prices when the country was reeling from the financial crisis in the late-1990s.
But ironically, according to some commentators û even those on the left such as Kim Geo-sung, chairperson of Transparency International Korea û public opinion is less likely than in the past to be aroused by Lone Star finally making a successful and profitable exit from its KEB holding, as the public's attention has been diverted to other issues, including President Lee Myung-bakÆs style of government. A call to netizens from website bloggers for candle-lit demonstrations around SeoulÆs City Hall would not have elicited the same response as the June attacks on LeeÆs decision to allow US beef imports, for instance.
The attitude of the regulators and the government has always been ambivalent at best. On the one hand, LeeÆs free market stance and keenness to create an environment attractive to foreign investment suggested support for the takeover (and, just as important, Lone StarÆs profitable divestment). But on the other hand, an HSBC takeover of KEB might have led to aggressive customer-base expansion, heating up competition in a banking market where margins are already under pressure.
After Citibank bought Koram Bank in February 2004, it offered higher deposit rates to premier clients and lower mortgage rates to attract business, and HSBC might have been tempted to do the same. The authorities might prefer that local champion Kookmin Bank purchases KEB instead: due diligence would be shorter, public opinion would be more easily assuaged and the previous administration under President Roh had already approved Kookmin as a suitable buyer.
Separately, HSBC also announced that it will sell its 18.68% stake in Financiera Independencia, a Mexican consumer lender. This, coupled with its decision to pull out of the KEB purchase, might indicate a move away from its previously stated emerging market strategy of focusing on building retail networks û leading to speculation, consistently denied, that it might look to take advantage of plummeting valuations and buy an investment bank instead.
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