In October 2006, the Industrial and Commercial Bank of China (ICBC) completed the world's largest initial public offering (IPO), listing shares on the Shanghai and the Hong Kong stock exchange, raising more than 21 billion dollars (Hill, 2011). The ICBC offered this IPO for numerous reasons, but foremost was that the ICBC wanted to attract investors with long term perspective; so it targeted foreign investors. Since ICBC already had a presence in 13 countries and regions globally, they understood that these foreign investments could help to reduce the entry barriers in various countries and other regions.
Another reason the ICBC offered the IPO to foreign investors because they felt that this was the best way to improve its capital strength, capital adequacy, profitability and sustainability. The ICBC also realized that foreign investment is a great way to improve the bank's balance sheets, risk management and modernize the bank's various systems to compete with competition. To assist with this endeavor, Merrill Lynch & Co. , China International Capital Corp. , Credit Suisse Group, Deutsche Bank AG and ICEA Securities handled the global share offering.
Underwriters for the domestic sale are China International Capital Corp. , Citic Securities Co. , Guotai Junan Securities Co. and Shenyin & Wanguo Securities Co (Chan, 2006). This proved to be extremely advantageous as the IPO was oversubscribed and proved to be a major success, enabling ICBC to raise the issuing price and raise billions more than they had initially planned. There were no disadvantages of ICBC offering this IPO. The main attraction of the ICBC IPO for foreign investors was the growing and profitable prospects of the ICBC.
The ICBC was a state owned bank, and at the time was expanding itself in the US, European nations and Asia. The size of IPO, large asset scale and revenue base of the bank was also another reason why foreign investors were attracted. But the real reason was that the IPO price was expected to be 2 to 2. 6 times the lender's book value, giving investors a huge potential to bring in a large payday (Chan, 2006). Another thing that helped the sale of the IPO was that there was a major foreign investment in ICBC during February 2006 when Goldman Sachs, American Express and Allianz Group bought a $3.
78 billion stake in it for assisting it in continuing development by utilizing their distinctive capabilities (Chan, 2006). This assistance provided favorable conditions to help lead the way in encouraging additional foreign investment in the IPO. Another reason for the attraction might be ascertained by looking at some historical factors. By the 1990s, the Chinese banking system was saddled with the massive burden of non-performing loans. From 1999 to 2004, China initiated banking reforms and has spent roughly $500 billion on bank bailouts, refunding taxpayer money and funds from foreign investors (Chan, 2006).
It really was not hard to believe that investors in 2006 found it difficult to buy into the idea of the promising Chinese economy growing and that its banks were not destined to grow with it. Although the China Construction Bank, Bank of China, and ICBC were scarcely house-hold names in global finance, they did have the potential of emerging as some of the bigger and well established banking institutions in the year ahead. So when you add all of those things up, and couple in the fact that the Chinese economy was growing at a very fast pace, there really was a no better place than China to invest.
There were risks that the foreign investor had to consider before they bought into the IPO. Chinese banks, including the ICBC, had a long history of recording bad debts, lending scandals and having to face tough competition from other foreign investment markets. Chinese banks required substantial government bailouts because of the issuance of bad loans made by their leaders for various political reasons, instead of sound investment strategies.
Chinese bankers assert that these issues were a thing of the past; but it was probably hard to convince investors, as Chinese government officials maintained operational control of the IPO, including lending decisions, even after ICBC made the IPO public (Lynch, 2006). The problem of persistent corruption in Chinese banks was another issue that needed to be addressed before the IPO was made public. Just two years ago, government auditors discovered a scheme to defraud the ICBC of almost $1 billion (Lynch, 2006).
China had to continually prove to investors that their banking institutions were free from corruption, and was to remain that way in order to attract investors. The ICBC also had to find a way to shed its image of being the old school "state-owned bank" and transform itself into a commercial bank capable of assessing risk and being competitive on the global market. Although the ICBC balance sheet presently appeared strong, they needed to show that the Chinese economy will not fall into a boom and boost cycle, as a slowdown in the economy could result in a weakening of asset value (Lynch, 2006).
References Hill, C. W. (2011). International Business: Competing in the Global Marketplace (8 ed. ). New York, NY: McGraw-Hill Irwin. Lynch, D. J. (2006). Chinese bank IPO expected to raise $19 billion. Retrieved June 15, 2012, from http://www. usatoday. com/money/world/2006-10-04-china-bank-usat_x. htm Chan, C. (2006, October 20). ICBC Completes Record IPO as Demand Tops $500 Billion (Update5). Retrieved June 17, 2012, from Bloomberg: http://www. bloomberg. com/apps/news? pid=newsarchive&sid=aWrKOcLNcHAc&refer=china