Watchman Newsletter

Bank of America Becomes Bank of Asia as Deals Resume

Bloomberg (Link) - Cathy Chan (December 2, 2010)

A black leather couch in Jayanti Bajpai�s 17th-floor Hong Kong office bears witness to Bank of America Corp.�s turn of fortune in Asia.

Twenty months ago, Bajpai sat on the sofa with discouraged Merrill Lynch & Co. colleagues, asking them one at a time to focus on the benefits of the firm�s merger with Bank of America, the largest U.S. lender by assets, he said. By the end of last year, conversations held on the same couch, which overlooks Hong Kong Park, had turned to deals.

Bank of America is headed for its best year advising on mergers and acquisitions in Asia-Pacific since 2005, and arranging initial public offerings since 2007, data compiled by Bloomberg show. The combined companies have generated 30 percent more revenue from traditional investment-banking businesses in the region than they did as separate entities, according to a person with knowledge of the matter who asked not to be identified because the figures aren�t public.

�It�s basically getting the focus back,� said Bajpai, 45, a 23-year Merrill Lynch veteran named co-head of Asia-Pacific corporate and investment banking in March 2009. �We spent five months stabilizing the ship, and then it turned. People were worried about the bank�s future, rather than worrying about the bank�s business.�

Winning Market Share

The Charlotte, North Carolina-based bank is winning market share for equity underwriting at the expense of UBS AG, Citigroup Inc. and Credit Suisse Group AG after hiring almost 400 staff in Asia since early 2009 and focusing on integrating Merrill Lynch�s investment-banking business with Bank of America�s corporate-banking platform. In M&A, the company has gained market share from Citigroup and Nomura Holdings Inc.

The acquisition of Merrill Lynch helped the lender establish a global footprint in such businesses as advising on deals, sales and trading and wealth management. It also deepened corporate-client relationships by providing a wider range of products and more conduits for raising capital.

Bank of America is ranked sixth advising on M&A and fifth on IPOs in the region this year, rising from 10th place in 2008 when the merger with Merrill Lynch was announced, Bloomberg data show. The bank is trailing Zurich-based UBS, Morgan Stanley, Frankfurt-based Deutsche Bank AG, JPMorgan Chase & Co. and Goldman Sachs Group Inc. in Asia-Pacific M&A advisory work this year and the latter four in IPOs. Morgan Stanley, Goldman Sachs, JPMorgan and Citigroup are all based in New York.

�Obvious Improvement�

�They�ve made obvious improvement this year, as the whole team in Asia has solidified after key management was in place,� said Ambrose Chang, who helps manage $3 billion at Daiwa SB Investments HK Ltd. in Hong Kong. �Right after the merger was announced, I barely received calls from their brokers, who were uncertain about their future. Things have now normalized, and they�re doing more IPOs and share placements.�

Bank of America, which didn�t have an investment-banking team in Asia, has benefited from Merrill Lynch�s strength in the Asia-Pacific capital-markets business. The U.S. brokerage was one of the top five IPO arrangers in the region from 2001 to 2007, except in 2003 and 2005, Bloomberg data show.

�While they�ve started climbing from the bottom of the ladder, there is still room to grow,� Chang said of Bank of America�s investment-banking operation in Asia. �It�s uncertain how much synergy the two firms can create because banks are more conservative about risk-taking and that could hinder the expansion of a pure brokerage firm like Merrill.�

Trailing in China

One key country where Bank of America trails investment- banking rivals is China: Unlike such firms as Goldman Sachs and UBS, the company still lacks a partner in the world�s fastest- growing major economy that would allow it to underwrite share and bond sales.

The bank hired former Goldman Sachs Group Inc. partner Peter MacDonald as vice chairman for Asia-Pacific in July to help speed up its expansion in China. Hong Kong-based MacDonald spent 17 years at Goldman Sachs, including a stint as chief operating officer of the firm�s Chinese venture partner.

Bank of America derived 9 percent of its total revenue from Asia for the year ended Dec. 31, 2009, the first since the merger, up from 2.4 percent in the previous two years, according to the company�s annual reports.

Net income from Asia surged almost sevenfold to $5.1 billion at the end of last year, in part because the bank sold a portion of its stake in China Construction Bank Corp., the nation�s second-biggest lender.

�There had not been enough investment in the Bank of America platform, and the Merrill operation was distracted over the past couple of years,� Brian Brille, 50, Bank of America�s Asia-Pacific president, said in an interview. �Now, with the successful integration, what happened in the last 12 to 18 months is extraordinary.�

Banker Departures

When Bajpai was asked to move to Hong Kong from London to run Asia-Pacific investment banking by Andrea Orcel, 47, then president of international global banking and wealth management, morale was at a low point, following a flurry of senior departures and cost-cutting, Bajpai said. He held his first group meeting in March 2009.

�My message was very clear: �I have no doubt we will win. We will go through an incredibly tough time, but we will come out of this as a leading franchise,�� he said he told 400 investment bankers. �People were wondering if we were going to survive.�

Merrill began losing bankers before Bank of America completed its takeover on Jan. 1, 2009. Damian Chunilal, former Asia-Pacific head of investment banking, left in November after 19 years with the firm. His exit was followed by that of Jason Brand, president of Asia-Pacific operations, and Raymundo Yu, chairman of the region.

Treasury Hires

Nelson Chai, appointed by John Thain to replace Brand in December 2008, quit two months after the former chief executive officer was ousted. Chai was replaced in February 2009 by Kim Hong, who was in the job for seven months. Jim Forbes, named Asia-Pacific head of corporate and investment banking in November 2008, returned to New York four months later and was replaced by Bajpai and Jiro Seguchi, who focuses on Japan.

To boost the integration of corporate and investment banking, the company this year hired Citigroup�s Ivo Distelbrink to run global treasury services and Charles Alexander, 53, from Standard Chartered Plc as head of corporate banking. The bank has hired more than 120 people since the start of 2010 for corporate banking and treasury services in Asia, a 30 percent expansion of those operations, said a person with direct knowledge of the matter who declined to be identified.

�Multiplier Effects�

The expansion is led by Thomas Montag, 53, president of global banking and markets, who has traveled to Asia four times this year, according to Jessica Oppenheim, a spokeswoman in New York for the bank. He was based in Tokyo and Hong Kong from 1998 through 2006 as a Goldman Sachs executive, including five years as co-president of Japan. Merrill hired Montag in May 2008, five months before it agreed to be purchased by Bank of America.

The bank secured an advisory role this year from Bharti Airtel Ltd., India�s largest mobile-phone operator, after it participated in arranging $7.5 billion of loans to the company for its acquisition of the African assets of Mobile Telecommunications Co., the Kuwaiti phone operator known as Zain. That�s something it couldn�t have done without the Bank of America platform, Bajpai said. The $9 billion transaction was the bank�s biggest M&A advisory job in Asia-Pacific this year.

�One plus one doesn�t equal two -- it does equal three in the sense that there are multiplier effects you�re getting from having a corporate-banking platform,� said Bajpai. �Our ability to compete has been significantly enhanced, and our revenue streams have diversified.�

Reliance Industries

In October, the bank helped Reliance Industries Ltd., owner of the world�s biggest oil-refining complex, arrange a $1.5 billion sale of senior notes, after advising the Mumbai-based company on its $1.7 billion purchase of shale-gas assets from Atlas Energy Inc. The sale was the biggest year-to-date corporate bond offering from India. Citigroup, HSBC Holdings Plc and Royal Bank of Scotland Group Plc also handled the sale.

�Their debt-market capabilities in the U.S. were important to us for the bond issue,� Alok Agarwal, Reliance�s chief financial officer, said in an interview. �If you look back over a period of three years, other firms had built a stronger franchise in India than either Bank of America or Merrill Lynch. They have been able to catch up rapidly by offering a full suite of products.�

Bank of America also advised Irving, Texas-based Pioneer Natural Resources Co. on the sale of its Eagle Ford shale formation to Reliance Industries in June.

Risk Analysis

Alexander, who worked for 10 years at Lehman Brothers Holdings Inc. until March 2008, said he and Bajpai are on regular calls with New York-based Marisa Harney, head of international risk-strategy development; her team in Asia led by Singapore-based Barbara Taylor; and Rahul Singhal, chief risk officer in Hong Kong, to make decisions on deals, loans and strategy after what he called a �thorough� risk analysis.

�We�re moving the needle in Asia, so we want to do more by working closely with our risk partners,� Alexander said.

In Australia, the bank made more than 35 hires in the third quarter of last year, including a team of 10 real estate bankers lured from UBS. It also recruited Craig Drummond from Goldman Sachs�s Australian securities unit as country CEO.

�Top House�

Now Bank of America is having its best year in M&A in the country in a decade, Bloomberg data show. It ranks sixth after advising Newcrest Mining Ltd. on its A$9.2 billion ($8.9 billion) purchase of Lihir Gold Ltd. and helping Carlyle Group and TPG Capital buy Melbourne-based Healthscope Ltd. for A$2 billion. The bank, the third-biggest M&A adviser in the country in 2000, slumped to 24th in the past two years, the data show.

In China, Bajpai brought back Liu Erhfei, 52, one of the most veteran Chinese bankers in Asia, this year from the firm�s private-equity unit to lead the country�s investment-banking business. He also hired Zhang Xiuping, 40, who helped boost Deutsche Bank�s China M&A ranking to seventh place this year from 12th when she joined the German lender in 2008.

�I�m happy with the progress, but it�s not where we want to be,� said Bajpai. �We want to be a consistently top house.� �

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