Caixin Weekly | Turbulence in Broker Mergers: Creating Super-firms or Forced Marriages? (AI Translation)

财新周刊｜券商合并风云涌动 打造航母还是拉郎配？

The China Securities Regulatory Commission (CSRC) set a goal to develop two to three top-tier investment banks in less than six months. As the first major securities merger, Guotai Junan Securities and Haitong Securities started their merger process on September 5, 2024. This merger is notable for being the largest "A+H" dual-market merger in the history of China's capital markets, with total and net assets expected to exceed those of CITIC Securities, making the combined firm an industry leader in revenue, net profit, and specific business segments [para. 1][para. 2].

China's stock market is the second largest globally, but its securities firms lag behind top international investment banks in capital strength and capabilities. China's largest brokerage, CITIC Securities, has net assets and profits only one-fifth those of Goldman Sachs. Mergers among leading Chinese securities firms are seen as a faster way to enhance scale and strength compared to organic growth [para. 4][para. 6].

Optimists believe the Guotai Junan and Haitong merger will resolve Haitong's issues, improve governance, and strengthen Guotai Junan's resources. They see it as creating synergies and internal risk management between well-established Shanghai-based state-owned assets systems. However, some argue that such improvements can't happen overnight, and may not substantially close the gap between Chinese and foreign firms. Chief Economist Li Xunlei expressed doubts about achieving a "1+1>2" effect, fearing a possible “1+1<1” outcome based on past administrative merger cases [para. 8][para. 9][para. 10].

The merger's expected integration could accelerate reforms in the brokerage industry, fulfilling its role as an intermediary better. However, beyond just capital strength, China's brokerage industry faces issues like market homogeneity that mergers alone can't resolve [para. 11][para. 12].

At a press conference in March 2024, Shen Bing of the CSRC highlighted institutional gaps in business philosophy, governance, and compliance compared to international standards. A finance professor noted fundamental differences in financial systems between China and the U.S., where China's reliance on bank loans contrasts with the U.S.'s market-dominated model. This suggests that mere size isn’t a universal advantage [para. 14][para. 15].

During the merger announcement, officials admitted the complexity of reorganizing personnel, institutions, and assets. The merger's necessity emerged as Haitong Securities faced internal control issues and performance declines exacerbated by international operations, especially through its subsidiary Haitong International. This operational complexity makes achieving a “1+1>2” effect challenging, hinging on Guotai Junan's ability to manage Haitong's troubled assets [para. 16][para. 25][para. 26][para. 27][para. 28][para. 29][para. 30].

Guotai Junan and Haitong Securities employees are expected to face significant restructuring, especially from Haitong's underperforming segments [para. 33][para. 34]. Industry experts cite that retaining core competencies while expanding through mergers should be prioritized over merely achieving large "aircraft carrier-class" size. The limited flexibility within China's state-owned enterprises could affect the overall efficacy of the merger [para. 39][para. 41].

Historically, U.S. investment bank mergers arose primarily from market needs, focusing on complementary strengths. Contrarily, government-initiated mergers during crises aimed to stabilize the financial system, preserve investors’ interests, and prevent market collapse. Overall, while mergers often strengthened firms, they also concentrated systemic risks, leading to moral hazards where firms believed government bailouts were guaranteed in crises [para. 43][para. 45][para. 47][para. 48][para. 52].

In conclusion, the merger between Guotai Junan and Haitong Securities represents a significant step towards achieving the CSRC’s vision of top-tier investment banks, aiming to synergize resources for greater industry competitiveness. However, the inherent complexities and risks of merging could undermine the potential benefits if not managed effectively [para. 56][para. 58].