In 2002, as Beijing was opening the Chinese economy to the world, the US private equity firm Newbridge Capital received an offer it couldn’t refuse: a controlling stake in Shenzhen Development Bank, a troubled but promising Chinese financial institution. Weijian Shan, the Newbridge executive in Hong Kong who fielded the proposal, tells the twisting tale of negotiating with government officials who constantly changed goals, and of warding off rival factions that sought to sabotage the deal. Shan’s story is compelling and replete with lessons on how business really happens in China.
- In the early 2000s, China’s banking sector faced high levels of bad loans.
- Newbridge Capital negotiated the purchase of Shenzhen Development Bank (SDB) with local officials.
- Negotiations between buyer and seller proceeded in fits and starts.
- As Newbridge delved into SDB’s books, deeper problems emerged.
- In May 2003, Newbridge filed suit over the blocked deal.
- Once Newbridge finally gained control of SDB, the real challenge commenced.
- SDB’s new CEO referred to himself as a “bank repairman.”
- A Chinese insurance company bought SDB in 2009.
In the early 2000s, China’s banking sector faced high levels of bad loans.
In 2002, a friend working as an attorney in Hong Kong approached Weijian Shan – an executive at private equity firm Newbridge Capital – about buying Shenzhen Development Bank (SDB), a nationwide bank based in the boomtown of Shenzhen. China’s banking sector was deeply troubled at the time: Some 30% of the loans of the nation’s four biggest banks were nonperforming. Still, China’s economy was growing, and the government had embarked on a project of sweeping economic reforms. Newbridge Capital, for its part, had successfully turned Korea First Bank around a few years earlier.
“The opportunity to buy control of a bank in China, home to the fastest economic growth in the world, was certainly appealing. Tantalizing, even.”
As intriguing as the opportunity to purchase SDB was, the deal presented numerous red flags. SDB was trading at five times its net asset value (NAV), a rich multiple, given that most banks in developed nations were valued at two times NAV. Multiples were high in China because its stock market was in the middle of a speculative boom. There was no way to know if SDB’s stated asset value was correct, however, given the distinct possibility of hidden nonperforming loans. More dauntingly, no foreigner had ever before secured control of a Chinese financial institution. Despite these concerns, Newbridge quickly signed a letter of intent to acquire SDB.
Newbridge Capital negotiated the purchase of Shenzhen Development Bank with local officials.
The city government of Shenzhen owned SDB. This fast-growing metropolis’s population had exploded from 68,000 in the early 1980s to 7.5 million by the early 2000s. The surge was a result of economic policies instituted by China’s then-leader, Deng Xiaoping. When Shan met with Shenzhen officials, he found that they were ready to embrace market-style operations. They wanted a private investor to take on SDB, fix its problems and bear any future financial risks. Shenzhen officials asked Newbridge to pay four times NAV. Shan countered with a multiple of just 1.5. Eventually, Newbridge agreed to pay 2.5 times NAV.
“Shenzhen was certainly at the forefront of market-oriented reforms.”
In a twist typical to doing business in China, the agreement about the multiple didn’t mean the matter was settled. Shenzhen officials later insisted that Newbridge pay a multiple of five times NAV. But the hefty multiple came with a wink and a nod – SDB’s value was negative, so a multiple based on zero didn’t really matter. Newbridge was left to juggle the government’s need for a face-saving headline number with its own desire to find a realistic price point. As they embarked on their due diligence, Newbridge executives were unsure what surprises they might find in SDB’s portfolio. To gain at least some leverage, Newbridge insisted on an agreement that bound the seller to Newbridge but let Newbridge walk away from the deal without penalty.
Negotiations between buyer and seller proceeded in fits and starts.
While Newbridge had been careful not to divulge its negotiations for SDB, a Chinese business publication broke the story, which was subsequently reported by Bloomberg and Dow Jones. SDB declined to comment, as did Shan. But everyone knew that a foreign company buying a Chinese bank was major news. As Newbridge researched SDB’s book of loans, it also negotiated with the Chinese bureaucracy for approval of the unprecedented investment. China’s central bank, the China Securities Regulatory Commission and the Ministry of Finance all needed to sign off.
“To allow a foreign investor to control a national bank was a huge deal.”
Meanwhile, Newbridge remained unsure about how much it could make from the transaction. Though the chief negotiator representing SDB suggested that the NAV was immaterial because the figure could be set at an arbitrary number, Shan was unwilling to commit to a price before due diligence was completed. The vice mayor threatened to walk away from the deal. Nevertheless, Newbridge continued to work with the accounting firm PwC to establish an accurate NAV. In the end, PwC’s findings were worse than expected: The accounting firm reported that the actual ratio of bad loans in 2021 was not 15%, as officially stated in the bank’s own records, but 30%. In the meantime, Shan dealt with a variety of other delays – including a revolving door of chief negotiators and new demands from government officials.
As Newbridge delved into SDB’s books, deeper problems emerged.
It soon became clear that SDB had hidden the depths of its problems. The bank had papered over its problem loans by making ever-larger loans to troubled borrowers – allowing them to pay old debt with new debt. For a Chinese auditor to sign off on such practices was business as usual, but Shan was surprised that a foreign auditor also stood up for the flawed work. The Newbridge team pushed back on how the foreign auditor had classified the loans. News of the questions got back to SDB officials and sowed distrust between the two sides.
Shan and another member of the Newbridge team had been approaching negotiations cautiously. They wanted to pay $120 million, or 1.38 times the bank’s reported book value. At this point in the negotiations, the seller wanted 1.65 times, or about $145 million. Newbridge’s cochair, David Bonderman, urged Shan to get the deal done as swiftly as possible; a difference of $25 million wouldn’t matter if Newbridge were ultimately able to turn SDB around. As soon as Shan agreed to the government’s proposed number, however, it boosted the asking price yet again.
“Our patience tested, our resolve intact, we moved to what surely would be the final stages – the last mile.”
Though Newbridge had acted in good faith throughout the process, the president of SDB turned on the Newbridge team during negotiations. Zhou Lin incessantly badmouthed Newbridge to other officials, supported a rival bidder and said SDB should risk a lawsuit by backing out of the deal. Even as Newbridge continued to make progress on the transaction with the support of the mayor of Shenzhen, the local party secretary ruled that the competing bidder Lin favored should be allowed to bid. That turn of events unleashed a broad response from Newbridge, including an appeal to the Chinese prime minister and a threat to sue Shenzhen officials for breach of contract.
Shan traveled to Beijing to meet with banking regulators, but they showed little interest in getting involved in what they considered a commercial dispute. SDB, for its part, put out a news release saying the deal was off. The Financial Times and other media outlets reported the news, with the clear implication that China was prepared neither to open its markets to foreign investment nor to reform its banking system.
In May 2003, Newbridge filed suit over the blocked deal.
Newbridge filed its case in Texas and named Chinatrust, the Taiwanese bank that SDB had contacted for a competing offer, as a defendant. Newbridge claimed “tortious interference.” The suit also named Zhou Lin. A number of media outlets, including The Wall Street Journal, Financial Times and South China Morning Post, covered the case. BusinessWeek described the legal action as “unheard of.” Indeed, foreign investors typically avoided suing the Chinese government for fear of scuttling future deals. But as Shan told a reporter, the sellers of SDB “didn’t realize they were dealing with a nut case.” Newbridge was willing to break the normal rules of engagement.
“A number of people close to inside sources told us that the deal was hopeless, ‘dead’ even.”
Shan continued to hope that the central government in Beijing would prevail upon the city government in Shenzhen to complete the acquisition. However, resuscitation of the deal seemed unlikely. The city had shuffled the leadership of both its bureaucracy and the bank. Still, Newbridge continued behind-the-scenes negotiations. Shenzhen officials had grown to despise Shan personally, so he stayed out of face-to-face talks while other Newbridge executives stepped in. Officials demanded that Newbridge end its arbitration. When Newbridge refused, they asked that Newbridge submit a formal letter saying it would consider withdrawing its case.
Once Newbridge finally gained control of SDB, the real challenge commenced.
Finally, at the end of 2004 and after more than two years of on-and-off negotiations, Newbridge took over SDB. Newbridge wanted an entirely new management team, and it tapped the American banker Jeffrey Williams to head SDB. Williams had attended Harvard University and worked in international banking – and, in a rare combination of skills, spoke fluent Chinese. Newbridge’s hard-won prize brought many problems. In addition to its high number of nonperforming loans, the bank’s deposits plummeted in early 2005. Williams was unconcerned, but the deposit runoff accelerated. Shan realized that, despite Williams’s experience, he had never run a failing bank and didn’t know how to handle a crisis of this type. Newbridge decided Shan would step in as a special adviser.
“I thought the bank was like a gravely ill patient who required immediate and major surgery.”
One of Shan’s first moves was to unwind SDB’s culture of nepotism. SDB fired a number of underperforming managers and replaced the hiring and promotion process with a merit-based system. Disgruntled employees were so aggrieved that they threatened physical harm to SDB’s leaders. The security threat was real enough that Newbridge considered moving its executives back to North America.
Meanwhile, Williams proceeded to undo the bank’s haphazard loan-approval process. SDB had operated as a set of fiefdoms. Williams enforced uniform standards for loan approvals. The new owners set out to attract more retail deposits and also to wall off the nonperforming loans in a “bad bank” inside SDB. Despite these positive steps, friction between Williams and Shan was mounting. Williams said he would not sign off on audited financial statements if Newbridge kept interfering with his management of the bank. Newbridge had to make a last-minute plan to find a new bank head.
SDB’s new CEO referred to himself as a “bank repairman.”
Frank Newman took over the top executive role at SDB. He compared a bad bank to a leaky boat that needed a patch to stay afloat. One of Newman’s repair jobs was SDB’s compensation structure: Bank employees knew they were in no danger of being fired and performed accordingly. “You got 100,000 yuan [$14,000] per year whether you did a good job or a bad job or didn’t even show up at the office,” Newman later told Institutional Investor. Another of Newman’s tactics was to embrace the concept of supply chain finance. The manager of an SDB branch in Guangzhou had made loans to small businesses by collateralizing their receivables. These short-term loans posed little risk – the suppliers sold to large companies that were likely to pay. But SDB hadn’t realized the full potential of supply chain financing. Newman rolled it out companywide, and SDB’s loan portfolio expanded.
“It is so true that the devil lies in the details. And in our case, it seemed that every time we got down to details, all sorts of devils appeared.”
A more difficult repair was reforming SDB’s share plan. After that long process was finally completed, the turnaround was in full swing. SDB shares soared from five yuan in 2005 to 30 yuan in 2007. GE Capital approached SDB about making an investment, but that deal fell apart because GE had negotiated for a stake two years earlier and wanted in at the much lower share price. Chinese regulators wouldn’t allow it. SDB shares continued to rise, and Yu Yeming, head of Baosteel, asked Shan if he would accept shares of China Construction Bank – one of the largest in China – as payment for Newbridge’s stake in SDB. “Of course,” Shan said. But Chinese officials quickly nixed that promising transaction: They didn’t want an industrialist like Yeming to also control a bank.
A Chinese insurance company bought SDB in 2009.
SDB’s share price continued rising – to 48 yuan in October 2007 – and the turnaround inspired a deal to sell another Chinese bank to foreigners. In 2007, a consortium that included Citibank bought Guangdong Development Bank. It would be only the second time – but it ended up being the last time – that China ceded control of a national bank to a foreign operator.
“Nothing motivates a buyer more than the risk of losing to potential competition.”
Though SDB’s share price finally cooled a bit, the bank’s recovery was a remarkable one. SDB was growing and reporting profits, despite continuing to charge off nonperforming assets from its bad old days. The bank continued to attract attention from suitors. In 2008, Ping An Insurance Group offered 39.9 yuan per share for Newbridge’s stake in SDB. Ping An’s head, Peter Ma, wanted to own a large bank and had shown an interest in SDB in the past. Ma’s offer was compelling, and Newbridge wanted to accept it; however, it had vowed not to exit the bank until the end of 2009. The potential early exit brought pushback from government officials, who had prioritized Newbridge’s commitment to keep the bank for at least five years. But Ma and Shan continued negotiating. SDB’s shares plunged to 10 yuan during late 2008 and then rebounded to 18 in May 2009. That month, Ma heard an inaccurate rumor that another bidder would buy SDB, and, after months of indecisiveness, he sprang into action. By June 2009, the companies had agreed to a share swap, and the deal closed at the end of 2009. SDB was later renamed Ping An Bank.
About the Author
Weijian Shan is a co-founder and executive chairman of PAG, a leading private equity firm in Asia. He previously was a partner at private equity firm TPG, formerly known as Newbridge Capital. He also was a partner at JP Morgan and a professor at the Wharton School.
“Money Machine: A Trailblazing American Venture in China” by Weijian Shan is an insightful and thought-provoking book that chronicles the author’s personal and professional journey in China’s financial landscape. As a first-hand account, Shan provides a comprehensive narrative of his experiences as a trailblazer in the country’s emerging private equity industry. The book offers valuable insights into the complexities of doing business in China and sheds light on the challenges and opportunities that arise in such a dynamic environment.
In Money Machine, Weijian Shan recounts his experiences as the founding managing partner of the private equity firm TPG Capital. He focuses on the firm’s investment in China, which was a major turning point in its history.
Shan begins by describing the challenges of doing business in China in the early 1990s. The country was still in the midst of economic reform, and there were few regulations in place. This made it difficult for foreign investors to understand the market and to protect their interests.
Despite the challenges, TPG Capital was able to make a number of successful investments in China. One of its most notable investments was in the Bank of China, which was the first foreign investment in a Chinese state-owned bank.
Shan also describes the challenges of managing a private equity firm in China. He had to deal with a complex bureaucracy, and he had to navigate the political landscape. He also had to deal with the cultural differences between China and the United States.
Despite the challenges, Shan was able to build TPG Capital into a successful firm in China. He made a number of profitable investments, and he helped to open up the Chinese market to foreign investors.
“Money Machine” is a captivating and well-written book that delves into the intricacies of China’s economic transformation and the rise of private equity. Weijian Shan, a seasoned financial professional, shares his unique perspective on the country’s evolving financial landscape, drawing from his own experiences as the key protagonist in the story. His narrative style is engaging, making it accessible to both experts in finance and general readers interested in understanding China’s economic growth.
One of the book’s strengths lies in Shan’s ability to provide a balanced view of the opportunities and obstacles he encountered while establishing the first Sino-foreign joint venture investment firm in China. He presents an honest account of the challenges he faced, including navigating cultural differences, dealing with bureaucracy, and building trust amidst a rapidly changing business environment. This level of transparency and self-reflection enhances the credibility of his story and helps readers appreciate the complexity of doing business in China.
Moreover, “Money Machine” offers valuable insights into the inner workings of China’s financial system, shedding light on the historical, political, and cultural factors that have shaped the country’s economic landscape. Shan’s deep knowledge and understanding of China’s financial markets are evident throughout the book, giving readers a comprehensive view of the opportunities and risks associated with investing in this vast and dynamic economy.
The author also explores the ethical dilemmas that arise when operating in a country with different standards and norms. He addresses the challenges of navigating corruption, adhering to ethical business practices, and maintaining integrity in a high-stakes industry. Shan’s reflections on these moral quandaries provide readers with valuable lessons and food for thought, encouraging a deeper understanding of the complexities inherent in conducting business in emerging markets.
While “Money Machine” primarily focuses on Shan’s professional journey and the broader context of China’s financial system, the personal anecdotes and glimpses into his personal life add a human touch to the narrative. This aspect of the book helps readers connect with the author on a more personal level, making the story relatable and engaging.
- Insider’s perspective: Shan’s personal experiences and insights provide a unique and engaging narrative that offers a fresh perspective on China’s financial industry.
- Cultural context: The book offers a rich understanding of Chinese culture and its impact on business practices, providing valuable insights for anyone interested in doing business in China.
- Practical advice: Shan’s experiences and lessons learned offer practical advice for entrepreneurs and investors looking to navigate China’s complex business landscape.
- Lack of depth in certain areas: While the book provides a comprehensive overview of China’s financial industry, some areas, such as the political landscape, are touched upon only briefly.
- Limited scope: The book primarily focuses on Shan’s personal experiences and insights, leaving some broader economic and political questions unanswered.
- At times, the writing can be disjointed: Some sections of the book feel disconnected or lack a clear narrative flow, making it challenging to follow at times.
Here are some of the key takeaways from Money Machine:
- Doing business in China is challenging, but it can also be very rewarding.
- China is a rapidly growing economy with a lot of potential for foreign investors.
- It is important to understand the Chinese market and to navigate the political landscape.
- Cultural differences can be a challenge, but they can also be an opportunity to learn.
- China is a country with a lot of potential, and it is worth investing in.
Money Machine is an excellent book that provides a unique perspective on the Chinese economy. It is a must-read for anyone who is interested in China or in doing business in China.
In conclusion, “Money Machine: A Trailblazing American Venture in China” is an exceptional book that offers a captivating account of Weijian Shan’s experiences in China’s financial industry. It provides a comprehensive understanding of the challenges and opportunities of doing business in China, and the author’s personal reflections add depth and authenticity to the narrative. Whether you are interested in finance, China’s economic growth, or the complexities of cross-cultural business ventures, this book is highly recommended for its insightful analysis and engaging storytelling.
Money Machine: A Trailblazing American Venture in China is a book that will appeal to a wide range of readers, including business professionals, entrepreneurs, and anyone interested in China’s economic development. It is an engaging and informative read that provides valuable insights into the country’s investment landscape, economic transformation, and the personalities that shape its business world. I highly recommend this book to anyone looking to gain a deeper understanding of China’s economic growth and the opportunities it presents.