Money Games

The Inside Story of How American Dealmakers Saved Korea's Most Iconic Bank

Weijian Shan

• Publisher: Wiley
• Year: 2020
• Print ISBN: 9781119736981
• eBook ISBN: 9781119736998
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

Money Games is a riveting tale of one of the most successful buyout deals ever: the acquisition and turnaround of what used to be Korea's largest bank by the American firm Newbridge Capital.

Full of intrigue and suspense, this insider's account is told by the chief architect of the deal itself, the celebrated author and private equity investor Weijian Shan. With billions of dollars at stake, and the nation's economic future on the line, Newbridge Capital sought to become the first foreign firm in history to take control of one of Korea's most beloved financial institutions.

In a proud country still reeling from a humiliating International Monetary Fund bailout in the Asian Financial Crisis, Newbridge Capital had to muster every ounce of skill, determination, and patience to bring the deal to closing.

Shan takes readers inside the battle to win control of the bank—a delicate, often exasperating process that meant balancing the goals of Newbridge with those of the government, bank employees, and Korea's powerful industrial titans.

Finally, the author describes how Newbridge transformed and rebuilt the struggling bank into a shining example of modern banking—as well as a massively profitable investment. In the secret world of private equity, few buyouts have been written about with such clarity, detail, and insight—and none with such completeness, covering not only the dealmaking but also the transformation and eventual exit of the investment.

For anyone who has ever wondered how private equity investors strike bargains, turn around businesses, and create immense value—or anyone interested in a captivating story of high-stakes money-making—this book is a must-read.

Chapter 1
Money Talks—My Path to Private Equity

A couple of years ago I had lunch with some senior executives of Jardine Matheson Holdings on the 48th floor of Jardine House in Hong Kong. Jardines, as it is known, is a British conglomerate founded in Hong Kong with a history dating back more than 180 years. It has interests in everything from aviation and hotels to retail and real estate. The firm's spacious private dining room was decorated with bright and cheerful Chinese paintings and had a breathtaking view of Victoria Harbour.

As my gracious host walked me to the elevator lobby after lunch, I noticed a giant oil painting, darkened with age. It was a portrait of an Indian man wearing a tall black headdress and a long-sleeved robe, cinched at the waist, that appeared to be made of cream-colored silk. He had a dramatic mustache, an enormous potbelly, and eyes that were both keen and kind. He was sitting on a cushioned chair, surrounded by scrolls. He held one in front of himself as if he had just finished reading it. On his chest he wore a large gold medal, signifying some kind of honor. Behind him sitting tall on a pedestal was a giant potbellied brass vase whose exterior bore some barely recognizable letters, which I made out to be CARITAS, a Latin word from which charity in English was derived. I was instantly curious about this man, who looked anything but English, and his prominent place in the head office of a distinctly British company.

“Who's he?” I asked my host.

“His name was Jeejeebhoy, the man who grew opium for us in India, which we shipped and sold to China,” my host replied nonchalantly. It was as if he were talking about someone engaged in selling vegetables.

I later learned that Jamsetjee Jeejeebhoy, a Bombay native, had amassed a fortune in the British opium trade to China. His “distinguished services” to the British Empire were recognized with a knighthood in 1842 and by a baronetcy conferred upon him by Queen Victoria in 1858, the first ever granted to an Indian.

I was a little surprised by my host's forthrightness. Jardines' historical role in the drug trade was common knowledge, but I thought they'd be more circumspect about it.

“Ah,” I said, “I thought it was an awkward subject to bring up.”

“Nothing awkward,” my host reassured me. “We say Her Majesty's government made us do it. But we aren't drug dealers anymore,” he added with a twinkle in his eyes.

We both laughed. Jeejeebhoy's story hints at Hong Kong's inception as a British colony. Jardine Matheson was one of the original foreign hongs, or trading houses, established in southern China, that engaged in trading goods like tea and cotton among Britain's far-flung colonies. It also had a major interest in smuggling opium into China. Eventually, the Chinese government began seizing and destroying this illegal cargo, so Jardines' principals lobbied the British government to send in gunboats. In the ensuing Opium War (1839–1842), Britain's military forces overpowered the Chinese and forced China to sign the Treaty of Nanking by which, as part of the settlement, China ceded the island of Hong Kong to Britain.

Western commerce in the region grew, the opium trade continued, and Britain continued to tighten its grip on the area around Hong Kong. In 1860, Britain annexed the Kowloon Peninsula, directly across Victoria Harbour, the body of water that gave Hong Kong its name. Roughly translated, hong kong means fragrant harbor, but by the mid-19th century, the British had named the harbor for their queen and established it as a center of international trade. In 1898, Britain secured a 99-year lease for the New Territories, a mountainous, mostly rural swath of land surrounding Kowloon that connected it to the mainland of China.

Jardines grew with the colony. The skyscraper I was dining in had been the tallest building in Hong Kong when it was completed in 1972, a testament to the hong's enduring legacy and recognizable for its unique porthole windows. Locals called it the “building of a thousand orifices,” as a BBC documentary on the British Empire delicately put it. “Doubtless, somewhere in the foundation lies buried the conscience of its founders,” deadpanned the narrator.

Hong Kong was still a British colony when my family and I arrived from the United States in 1993. Under British rule, Hong Kong had prospered, attaining a living standard among the highest in the world by the early 1990s.

Located at the southern tip of China, with a land area of about the same size as the city of Los Angeles, it was a laissez-faire market economy, among the freest in the world. As an economic gateway to mainland China, Hong Kong was the regional headquarters to many multinational companies and international financial institutions. From Hong Kong, a business traveler could cover almost all of Asia: Beijing, Shanghai, Tokyo, Seoul, Taipei, Bangkok, and Singapore were all less than a four-hour flight away. English was widely spoken, and families of foreign expatriates could live comfortably there. Despite our Chinese background and Hong Kong being a Chinese city, my family and I considered ourselves outsiders. We did not speak or understand the local Cantonese dialect.

Before moving to Hong Kong, for six years we lived in the United States, in Philadelphia, where I was a professor at the Wharton School at the University of Pennsylvania. The life of an academic at an Ivy League university was comfortable, although it became a little dreary after a few years. American business schools are not exactly ivory towers. Their professors frequently maintain strong ties to the business world, and Wharton had particularly close interactions with Wall Street. While I never felt too removed from the real world of business and finance, I longed for a taste of real action. It seemed a bit ironic that I had been teaching business for so long without having actually done any.

By the early 1990s, China's growth had captured Wall Street's imagination—and I followed developments there with keen interest. At the time my research and teaching were focused largely on the management of multinational corporations and on the biotechnology industry, which had nothing specifically to do with China or Asia. Even so, I had grown up in China during its tumultuous years, so I had an intrinsic connection to the country. (My memoir, Out of the Gobi: My Story of China and America, chronicles my experiences during this turbulent period.) Eventually, I found my way to the United States, where I received a PhD in business administration at the University of California, Berkeley before becoming a professor at Wharton.

Because of my roots I had followed the developments in China with keen interest and I visited the country from time to time. At Wharton, I founded China Economic Review, an academic journal dedicated to researching China's rapidly changing economy and role in the global business landscape. My credentials as a professor at a top business school, combined with my knowledge of the country, were inevitably attractive to some firms with ambitions in the Chinese market. When opportunity knocked on my door, I was ready.

In 1992, I was approached by several major companies involved in management consulting or investment banking. Eventually I decided that the latter, which mainly helps businesses raise capital, was more interesting, and I began to explore related opportunities. In emerging markets, companies grow fast. Businesses tend to be more willing to pay for access to capital than for just knowledge and advice. Money talks, I thought, and at an investment bank, I figured my job would be easier than at a consulting firm.

I was recruited by a tall, shrewd banker named Tad Beczak, then the president of JP Morgan Securities Asia. He took me to a restaurant in New York City for lunch in early 1993. I had expected him to tell me how wonderful it would be to work for his bank. To my surprise, he looked at me across the table with his penetrating eyes and told me, “It's going to be hard.” However, he suggested, I might have what it took to succeed.

I found Beczak to be down-to-earth and straightforward, quite different from the stereotype of a Wall Street banker. He had a good knowledge of the Chinese market, especially its challenges and pitfalls. I took an immediate liking to him—and the prospect of doing something new, even something difficult, excited me.

I was offered a job as vice president in JP Morgan's Hong Kong office, with an additional title: Chief Representative for China. At industrial firms, vice presidents are big shots, but investment banks mint them by the dozen. Knowing this, I did not like the title. Even though I had zero experience in banking, I thought my credentials as a business professor ought to count for something. Eventually I accepted the offer, understanding that I needed to prove myself before getting a more senior position.

My major responsibility at JP Morgan was to get clients, typically large companies, to hire us to raise capital for them by underwriting their initial public offerings (IPOs) in overseas markets, or to provide other financial and advisory services. Underwriting IPOs is extremely lucrative for investment banks. Typically, we charged a fee representing a percentage of the capital raised. If the client raised $1 billion, our 5 percent fee would be $50 million (the actual percentage varied). However, qualified IPO candidates were hard to come by in China, and obtaining the mandate to underwrite their stock offerings was a fiercely competitive business.

When I arrived in Hong Kong in 1993, China was still a poor and developing country. In that year, its gross domestic product (GDP) was only $440 billion, one-sixteenth of that of the United States (about $6.8 trillion) and one-tenth of that of Japan (about $4.4 trillion). China's per capita GDP was only $377, a tiny fraction of that of the United States (more than $26,000) and of Japan ($38,000).

At this early stage of China's economic development, any business of decent size was state-owned. Factories were organized like an extension of the government and reported to certain ministries, such as Ministry of Textiles or Ministry of Machinery. They each functioned like a department of the government. As such, they had to be restructured as joint stock companies before they could be offered to overseas investors. There were only a few IPO candidates, all of which were carefully selected by the Chinese securities regulator. From 1992 to 1994, just 31 companies received approval from the regulator to go public on overseas stock exchanges. Each year there were more foreign banks chasing IPOs than there were IPO candidates.

I soon realized, somewhat to my dismay, that not only was I new to the game, but my employer was as well. JP Morgan had a long history, dating back to 1871. But the House of Morgan had been broken up in the 1930s by the Glass-Steagall Act, split into Morgan Stanley, an investment bank, and JP Morgan, a commercial bank. This set of laws, passed in an attempt to eliminate conditions that had helped cause the bank failures of the Great Depression, restricted a commercial bank to collecting deposits and making loans. It was not until 1989, four years before I joined, that the law was relaxed to permit the likes of JP Morgan to get into investment banking business, albeit in a limited way. In 1993, the bank was still building its investment banking business, and its underwriting capabilities were weaker than those of established houses, such as Morgan Stanley and Goldman Sachs. Those competitors were known as bulge-bracket banks because they were listed first, in bold type sizes, on the covers of stock offering documents.

JP Morgan's lack of a track record made it doubly hard for us to market ourselves to clients and compete with our bulge-bracket peers. To add to our difficulties, our pool of potential clients was smaller because JP Morgan was able to underwrite stock offerings only in the U.S. market, but not in Hong Kong, where most Chinese IPO candidates chose to go public. The saving grace was that none of our potential clients knew much about overseas capital markets or foreign investment banks. They were reliant on us to walk them through the process, and we made sure to make ourselves look as good as possible while doing so. As a former professor, I could be quite convincing, helped by the investment bank rankings, or league tables, prepared by my colleagues, who often placed JP Morgan at or close to the top.

Only later did I learn that every investment bank rejiggers these league tables to make itself look better. For example, if a league table showed we were in the top three in underwriting U.S. IPOs for Korean companies, it might mean that out of 100 Korean companies that had gone public in a five-year period, only three chose the U.S. market for their IPO, and in that year the bank was able to do one. To an unsophisticated client, though, being in the top three would seem quite impressive.

However, our competitors had their own league tables, and often a track record of underwriting Chinese IPOs, something we lacked. I found myself unsuited for the job because I could not honestly tell a client we were better qualified than our peers when I did not believe that was the case. I could only try to win their trust by going the extra mile, visiting with them so frequently that I am sure I came across like a type of human superglue. But still, it was an uphill battle, and one that was often too hard to win.

One of the IPO mandates I won was from Dongfeng Motor Company (DFMC), one of the three largest automobile manufacturers in the country. It was located in the middle of nowhere, deep in the mountains, accessible only by a slow train or a narrow dirt road, which zigzagged past steep walls of jutted rocks on one side and deep ravines on the other. The road was so bumpy it felt as if all my bones had been shaken loose after the four-hour ride. It was also so dangerous that a couple of times I saw the smoldering remains of vehicles that had plunged off the ...

Table of contents

• Cover
• Table of Contents
• Foreword
• Acknowledgments
• Author’s Note
• Preface
• Chapter 1: Money Talks—My Path to Private Equity
• Chapter 2: Project Safe
• Chapter 3: White Knight
• Chapter 4: New Faces at the Table
• Chapter 5: Deadline Looming
• Chapter 6: The Ambassador
• Chapter 7: Presidential Visit
• Chapter 8: The Chairman Takes Charge
• Chapter 9: Daewoo Crisis
• Chapter 10: Black Rain
• Chapter 11: Ultimatum
• Chapter 12: Sign It or Forget It
• Chapter 13: The Final Sprint
• Chapter 14: The Hard Part
• Chapter 15: Change Agent
• Chapter 16: Lion’s Chase
• Chapter 17: It’s a Race
• Epilogue
• Appendix AppendixA Primer on Commercial BankingA Primer on Commercial Banking
• Index
• End User License Agreement