A Bid to Become Global Investment Bank

Can a gigantic financial dinosaur with 50 trillion won (equivalent to $50 billion) worth of assets succeed in Korea like Goldman Sachs? The next administration of Lee Myung-bak plans to transform state-owned financial institutions into a single global investment bank. Pros and cons are debating over the feasibility of the ambition.

The idea originally was conceived as a part of the privatization of the banking industry. The establishment of a powerful investment bank was initially intended to incorporate Korea Development Bank and Daewoo Securities into a super-bank worth 20 trillion won. Now, the plan advanced to a higher level of creating an ultra-gigantic bank worth 49 trillion won by adding Industrial Bank of Korea and Woori Bank.

In a nutshell, the authorities seem eager to establish a financial institution larger than the world’s biggest company, Goldman Sachs ($39.1 billion), to boost its global competitiveness.

Financial experts and specialists, however, showed lukewarm reactions so far. According to them, a global investment bank needs other requisites such as highly trained human resources, advanced financial techniques, networks and reputation. Otherwise, they argue, the plan will end up costing a huge amount of money without posting substantial results. The market watchdogs doubt whether South Korea retains a pool of such quality human resources, although they do not disagree that enough money is already there.

○ Large in Size with Humble Human Resources

The Swiss International Institute for Management Development released its 2007-2008 Global Competitiveness Report recently stating that the quality of South Korea’s human resources ranked 42nd among 61 subject countries.

The Financial Skills Network Center studied 10 domestic securities firms, and tallied that they retained, as of the end of 2006, only 1,230 employees specialized in investment banking, or less than one tenth of the staff size of Goldman Sachs or Merrill Lynch. Aware of the problem, Korea Securities Dealers Association chairman, Hwang Kun-ho, promised recently to invest three billion won every year to foster financial specialist pools.

The shortcoming stood out in the burgeoning domestic Merger & Acquisition (M&A) market.

○ Snippet of Goldman Sachs’ Human Pool

According to Thomson Financial, which provides international financial information, the transactional size of the domestic M&A market amounted to $73.7 billion last year, a 78% hike from that of 2006 ($41.4 billion). Top ten consulting firms are all foreign corporations, earning $63.6 billion (86%) of the total revenues.

Korea Investment & Securities CEO Ryu Sang-ho confessed, “Successful transformation as a global investment bank depends on who will lead the organization. It is not easy to secure qualified specialists who can compete with global companies.” In other words, an unsubstantiated institution of a gigantic size only ends up as a brainless dinosaur.

○ Insufficient Factors

Experts also pointed out that it will take a long time for a financial institution to acquire the networks and reputations that renowned foreign investment banks have accumulated.

Citi Global first asked whether Doosan Group was interested in acquiring an overseas company. Citi Global was providing consulting services to the group at that time. The group accepted it and the acquisition was the biggest success in Korea. The consulting firm discovered through its own intelligence gathering that Doosan Group failed to acquire a U.S. company, “Bob Cat,” unofficially. Last year, the firm confirmed that the American company was up for sale again.

Due to such reason, the domestic securities firms cannot solicit the domestic corporate clients when craving to raise capital overseas.

○ Fledgling Nature

Korea Development Bank recently sold the Global Bond in the U.S. For that purpose, the bank retained five foreign investment banks including Goldman Sachs and HSBC.

A senior officer of the bank said, “International investment banks know lots of financial big shots overseas, selling off what we issue. If a company fails to issue a bond, its credit gets crumbled. No wonder companies don’t retain domestic financial institutions to raise money overseas.”

Another state-run bank officer added, “When the government sells its shares, it’s better to retain international banks with reputation and reliability to reduce risks.”

○ Specialization

The future is not entirely gloomy. There are some competitive precedents for the domestic companies to benchmark.

The Australian Macquarie Bank began its operation in 1969 as Hill Samuel Australia (HSA), a subsidiary of a British merchant bank. Ever since, it has specialized in investing in the social overhead capital sector, and is now considered as the world leader in the field. In 1997, its assets amounted to 6.1 billion Australian dollars. But the value shot up to 106.1 billion Australian dollars as of 2006.

JPMorgan has long delved in the syndicated loan business in the M&A market, maximizing its know-how acquired from commercial banking. JPMorgan Korea CEO, Lim Seok-jeong, advised, “Domestic firms have narrowed the gap among its global counterparts in terms of financial techniques and know-hows. As a late starter, they can shine their names in the investment banking area only when they choose the right fields and specialize in them.”

Samsung Securities, for example, set an encouraging example last year when it helped Fila Korea acquire a global brand ownership. Korea Development Bank was another successful example. It helped LG Electronics to sell $500 million worth of Eurobond overseas.

Investment Banking Department director Kim Bum-jun at Korea Investment and Securities stressed, “South Korea has the fundamentals required of a global investment bank. It is the world’s 11th largest economy and has the second largest bond market in Asia. With the experiences and achievements in Korea, the domestic banks can post positive marks in the global market.”

larosa@donga.com