As a global trader interested in aligning my money with the most powerful trends of the day, I’m constantly watching the headlines in search of the latest moneymaking opportunity.
I am particularly interested in stories that emblazon the front pages of newspapers everywhere else around the world, but that barely even rate a mention here in the United States. So often, this signals an important investment opportunity that the “herd” has yet to discover. I like to call this my “Rule of the Back Page.”
The ongoing Barclays PLC (NYSE: BCS) /ABN AMRO Holding NV (NYSE: ABN) saga is a terrific case in point. Although the deal isn’t done, the way it’s been structured – with private-equity financing from the China government – suggests there are powerful changes looming in the financial markets. And that means there will be new ways for savvy individual investors to profit in the years to come.
The essence of this fascinating financial tale is this: The China Development Bank just plunked down $3.03 billion to buy a stake in Barclays, an old line European banking legend. Factor in China’s recent $3 billion investment in The Blackstone Group LP (NYSE: BX), the U.S. private-equity powerhouse, and savvy market-watchers will suddenly realize the Chinese government has achieved several key objectives. Indeed, China has:
- Purchased unprecedented access to the global financial markets.
- Acquired what’s arguably the very best investment-banking expertise in the world.
- Lined up a steady flow of opportunities for its $1.3 trillion in foreign reserves (an amount that’s reportedly growing by another $200 million every six months).
To give you an even better understanding of the deep game that China is playing, consider this: With the $3 billion investment from the Chinese government, Barclays has been given the equivalent of an open hunting license in China, which desperately wants (and needs) to modernize its commercial banking industry.
But Barclays isn’t the only one that gains here: With its shrewd maneuverings, China is a “stealth” beneficiary. You see, because China is now a valued Barclays shareholder, any outsized profits that accrue to Barclays also accrue to China’s government-investing operation.
And that’s above and beyond the gains in commercial-banking and capital-markets expertise that we already mentioned. All of these things were previously unavailable to the Chinese.
Where the rubber meets the road as far as I'm concerned is that deals like Barclays and Blackstone provide us with an important early insight into a favorite strategy of mine: Making money by investing in companies that will benefit “because of” China. And that’s a strategy that will lead to much greater short-term profits – and at a much lower rate of risk – than strategies that focus solely on investing “in” China.
[Editor’s Note: Watch for a new investment-research report by Keith Fitz-Gerald on this very topic in the near future. Fitz-Gerald will not only detail the strategy itself, but will also outline the companies best positioned to benefit. The research report, and the accompanying recommendations, will be free of charge to all Money Morning subscribers.]
The Background on Barclays
London-based Barclays is courting ABN AMRO, a 183-year-olf Dutch bank, but so is Barclays arch-nemesis Royal Bank of Scotland (LON: RBS). As of early August, both parties were offering almost-unfathomable amounts of money in what may ultimately be the richest buyout in financial history.
But it wasn’t always that way. In fact, back in April, Barclays was ABN’s only suitor. The problems surfaced in July, when RBS trumped Barclays by showing up with a higher offer of its own for ABN.
Barclays execs were forced to scramble and find additional money for a boosted bid. Their search took them to the other side of the world, and to the most unlikely of sources for private-equity capital: The government of China. Indeed, the China Development Bank agreed to help Barclays up the ante, and kicked in some $18.76 billion in cash.
At present, the Barclays bid is estimated at $92 billion, of which approximately 37% is in cash. RBS is offering roughly $97 billion (give or take a few dollars, depending on the exchange rates of the day, thanks to a financing consortium that includes Banco Santander SA of Spain, and Fortis NV, which also is Dutch).
But where Barclays wants ABN lock, stock and barrel, the RBS-led consortium wants to take ABN apart, and split it amongst the participants, much like a pack of wolves would split up the carrion of a kill.
Interestingly, the ABN board initially favored the acceptance of the Barclays’ bid, noting that it was consistent with ABN’s “strategic vision.” But the board has apparently had a change of heart in the past few weeks. This doesn’t particularly make sense, given that ABN CEO Rijkman Groenink is on record as saying that he prefers the lower Barclays’ bid because it carries less “execution risk.”
But then again, few things rarely make sense in the hidden world of mergers and acquisitions.
When $5 Billion Less is a “Better” Deal
In effect, Groenink is saying he’d sooner take a $5 billion hit and leave money on the table than risk a failed transaction and the possibility of more money at the day’s end. This suggests there’s more to this deal than meets the eye….and there is – especially if you take the time to “read between the lines.”
What the ABN CEO isn’t saying (but is most certainly thinking) is that he’ll take the Barclays deal backed by the funding from China, because he knows the cash-rich Chinese are good for it and that there’s almost no chance the deal will fail. Besides, I’m betting that he also believes Barclays has the $5 billion in question, and that someone will simply pony up the additional cash when the time comes – no questions asked.
Clearly, too, he’d rather take the certainty of the well-funded deal over the uncertainty of an extra $5 billion from a consortium that will likely break up his bank when the deal is done.
His board of directors, on the other hand, seems to want the additional $5 billion. However, rumor has it that the directors are also concerned that China’s involvement in such a deal is a “national” problem along the lines of the U.S. concerns that essentially forced the China-controlled CNOOC Ltd. to drop its $18.4 billion bid for Unocal Corp. two years ago...at least if you believe the global grapevine.
And the Barclays board has some major concerns of its own. They have to realize that if their gambit fails – and RBS ends up as the triumph bidder for ABN AMRO – that Barclays itself will end up as a takeover target. It’s the ultimate irony, but it happens all the time. Since former Barclays director Justin Urquhart-Stewart was recently quoted as saying as much, I’m certain I’m right on that point.
It’s the oldest story in the M&A world…the hunter becomes the hunted. If one suitor that’s going for growth strikes out in its bid for a company, it suddenly finds itself bore-sighted by other players who sense its weakened condition … just like circling sharks who sense when there’s “chum” in the water. One case-in-point is PacificCorp., which spent more than $300 million in failed bid for Britain’s Energy Group – and wound up being taken out by Scottish Power.
Both ABN AMRO bids have their strong points, and that’s what makes this affair so very interesting. In true Asian fashion, the circle truly does go around, so bear with me as I bring this full-circle and close the loop for you.
The ‘Great Wall Street’ of China
By agreeing to help Barclays pursue ABN AMRO, China’s Development Bank is demonstrating a very sophisticated understanding of how the world’s capital markets work, as well as a real willingness to do what it takes to “play with the big boys.” What’s more, despite cultural norms that in the past would likely have prompted China to withdraw from the international deal arena after it “lost face” by failing at its first deal, the Barclays bid for ABN demonstrates a newfound shrewdness and newly acquired willingness to learn from its mistakes.
For instance, the China Construction Bank purchased Bank of America’s Hong Kong and Macau branches, while Singapore’s Temasek Holdings acquired a 12% stake in Britain’s Standard Chartered Bank – becoming the largest shareholder in the process. Of course, people are more familiar with the Blackstone infusion made by China’s State Investment Company, a deal that made headlines around the world.
But here’s where it gets really interesting: What few folks realize is that Blackstone served as the China Development Bank’s financial advisor when it made its initial $2.2 billion investment in Barclays.
Hmmm…see a pattern here? I thought you would ...
What’s happening is uniquely Asian and Chinese on one hand, with a smidgen of Gordon Gekko mixed in for flavor. Not only have the Chinese waded into the world’s capital markets with amazing speed, but they are apparently unafraid to bring substantial resources to bear in the process.
This represents a marked change from historical norms in which the Chinese operated largely inside their own sphere – inside their own borders, where they were content to implement their own relatively primitive and ineffective changes in what was a highly protected financial market. These surprising developments also suggest a willingness to learn from “the best,” which, in the ultimate irony, means us.
In traditional China, a failed deal like the afore-mentioned move on Unocal would once have represented such a loss of face that any attempts at global dealmaking would have ceased right then. But China’s budding financiers had a real revelation: The nation’s politics and human rights reputation very likely made it an undesirable outright suitor, or direct partner. But, by stepping in behind an acceptable “front man,” China was one giant step removed from any financial transaction. And when that front man is an all-American wheeler-dealer like dealmaker Blackstone, well, it suddenly doesn’t matter as much who you’re bringing to dinner – or to the deal table.
Why China of 2007 Isn’t Japan of 1987
While many investors are stunned to see the Chinese on the financial scene in such a big way, longtime global market makers aren’t surprised at all. Indeed, they’ve been expecting this for some time.
You see, they recall all too well what happened back in the late 1980s. If you recall, like the Chinese now, the Japanese then were flush with cash and were buying everything that wasn’t nailed down – and even a few things that were.
I know…I was there in the institutional markets helping them do it.
Almost overnight, the newly wealthy Japanese were viewed with fear. Americans talked about the invincible “Japanese superman,” an unstoppable juggernaut who never made mistakes. Japanese cars filled American roadways, and Japanese-owned companies started buying up all sorts of high-profile “trophy” assets: Universal studios, Columbia Records, Rockefeller Center and the Pebble Beach golf course (with its lonely cypress tree) all had new ownership. Lawmakers sounded the alarm, and so did the U.S. news and entertainment media. Fortune magazine carried a piece entitled, “Where Will Japan Strike Next?”And author Michael Crichton’s alarmist book, Rising Sun, was made into an equally alarmist – but no less fun to watch – feature film that starred Sean Connery and Wesley Snipes.
Several things make it different this time around, with China:
- First, while Japan had the money to pull off the deals, it didn’t have the economic backing to sustain them. So it’s no surprise that Japan’s economy fell off a cliff for 15 years, and has only recently started to claw its way back to its prior heights. But China, on the other hand, boasts an economy that’s growing at three times the speed of its U.S. rival. And, by most estimates, it can continue to grow at this pace for several decades to come.
- Second, the Japanese buying spree of the late 1980s was confined largely to hard assets, with only a smattering of actual corporate buyouts mixed in. Perhaps the fatal flaw was that Japan just couldn’t get past the notion of intrinsic growth, and never lost its preference for growing things internally. Had Japan been able to get past this mental roadblock, it might actually have ended up with the global diversification necessary to stave off the worst portion of its long depression – but that’s merely conjecture on my part.
- Third, China is avoiding the other key missteps that Japan repeatedly made. The Chinese are not only buying the companies they need, they’re snapping up the required resources and intellectual capital, too. In marked contrast to the mid-1980s Japanese, China’s business leaders of today have no qualms about buying the intellectual advice they need to make sure they’re deploying their cash in the most efficient places possible. What’s more, they are not confining their efforts to hard assets as the Japanese did and that means individual investors can grab a piece of the action along the way.
The Next Places to Profit
Speaking of which, I think the next great wave of Chinese acquisition targets will be Canadian resource companies valued between $200 million and $1 billion. Not only are they financially transparent, but many of these companies possess reserves valued above and beyond present cash flows. And when a potential suitor wants these properties as badly as China clearly does, they will pay up – meaning that these companies will go out at a value greater than anything we’d ever think to calculate using our conventional valuation models.
The pace of those deals will start accelerating in the very near future.
Contributing Editor Keith Fitz-Gerald, a brand-new addition to the Money Morning research team, is one of the world’s foremost experts on the Asian markets, especially China and Japan. A professional trader who works with wealthy investors and institutions, Fitz-Gerald is also a seasoned market analyst known for his accuracy, perspective and insight, Fitz-Gerald is also a professional trader who has worked with high-net-worth investors, and who’s also advised major institutions. A truly global investor and an expert on Asia, he and his family split their time between Portland, Oregon and Kyoto, Japan.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.