Bear Stearns and China Citic swap $1 Billion Stakes in Each Other

By Mike Caggeso
Staff Writer

Bear Stearns Cos. Inc. (BSC) and Asia's largest securities firm, China Citic Securities Co., agreed to invest $1 billion in each other.

The deal secures broad access to China investment-banking business for Bear Stearns, who lags in China investments compared to its rival Wall Street securities firms. Its third-quarter profit plummeted 61%, and its stock has fallen 28% year-to-date.

"We are confident that combining our operations in Asia with Citic Securities will greatly benefit Bear Stearns' global client base and generate substantial new revenue and growth opportunities for the firm," Bear Stearns Chairman and Chief Executive James Cayne said in a company statement.

Government-controlled China Citic will buy 40-year convertible trust preferred securities in Bear Stearns. In return, Bear Stearns will buy six-year convertible debt and five-year options in China Citic. They also plan a joint venture in Hong Kong.

China Citic will buy the equivalent of 6% of New York-based Bear Stearns' shares and collaborate to sell financial products and services in China, the companies said in a statement yesterday. China Citic could boost its stake of Bear Stearns up to 9.9%.

Bear Stearns' shares buzzed a few weeks ago when Citic's announced its interest in investing in Bear Stearns. At the time, Bear Stearns' was a true value play after its shares had been beaten down by the worldwide credit crunch. China Citic wasn't the only interested company, as Bear Stearns was talking with Wachovia Corp. (WB), Bank of America Corp. (BAC), China Construction Bank Corp., and Warren Buffet via Berkshire Hathaway Inc. (BRK.A, BRK.B), according to other published reports.

In September, billionaire Joseph Lewis struck a deal when he offered $860.4 million for a 7% stake in Bear Stearns.

If approved by China and U.S. regulators, this will mark the second mainland China purchase in a U.S. bank. The first occurred two weeks ago when China Minsheng Banking Corp. Ltd. acquired a 9.9% stake in San Francisco's UCBH Holdings Inc. (UCBH).

Both purchases underscore efforts of China banks to expand worldwide. In August, Industrial & Commercial Bank of China Ltd., China's No. 1 bank by assets, acquired a 79.93% stake in Seng Heng Bank Ltd., which is the third-largest lender in Macau. Last year, China Construction Bank Corp., paid $1.2 billion for Bank of America Corp.'s (BAC) 17 branches in Macau and Hong Kong.

And analysts are forecasting more Chinese banks expanding internationally.

"What you are seeing here is the growth of globalization," Eugene Fram, the J. Warren McClure Marketing Research Professor at the Rochester Institute of Technology College of Business, told Money Morning during an interview about the Minsheng purchase. "It also demonstrates the increasing affluence of China and of Chinese companies, which are now reaching out to extend their global position beyond their own country. This is an embryonic deal – embryonic in that it marks the birth, or beginning, of something very new."

News and Related Story Links:

• Bloomberg:
  Bear Stearns, China's Citic to Invest in Each Other.

• MarketWatch:
  Bear Stearns' quarterly net tumbles 61%.

• Money Morning:
  China Citic Looks to Buy Bear Stearns at Bargain Value.

• Money Morning:
  Minsheng Becomes First Mainland China Bank to Invest in a U.S. Bank