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Wall Street bankers walk a fine line in pitching to China

Bankers seeking business in China are finding that deals there are sometimes putting them in awkward positions with clients in other parts of the world


Among bankers on Wall Street the conversation invariably turns to one subject: China. They have just gotten back from a big trip to Beijing or are about to leave on one.

Henry Paulson Jr, the chairman of Goldman Sachs, talks about the number of trips he has made to China each quarter as if it were a metric to be included when computing the firm's earnings. And, of course, the takeover bid for Unocal by CNOOC, one of China's top oil and natural gas companies, has made the country the subject du jour.

But as Wall Street's biggest firms rush to build their businesses in China, some have put themselves in tough spots with their clients in other parts of the world.

Lehman Brothers, which has been aggressively wooing Chinese clients, also happens to be the banker for Chevron in the battle for control of Unocal, the US oil company.

Chevron's strategy in seeking public support for a deal with Unocal has included denouncing CNOOC's offer not just on its economic merits, but also as a Chinese government-sponsored bid that threatens America's national security. Chevron's lobbying campaign in Washington all but compares China to the Soviet Union during the cold war.

This has made for some awkward moments for Lehman Brothers in China.

"Pitching business there at the moment is not the easiest thing to do," lamented a Lehman banker who just completed a trip to Hong Kong that he called "unsuccessful."

Morgan Stanley may face the same conundrum. Morgan Stanley, which is also trying to create a franchise in China, is representing Unocal. Relying in part on Morgan Stanley's advice, Unocal's board has rejected CNOOC's bid, which is actually higher than Chrevron's offer, as too low, considering the political risks.

While China's executives and, more important, its government officials, must realize that bankers are mercenaries, it is also true that loyalty and long-term relationships matter.

"Conflict resolution is tremendously complex to start with for most big firms," said Steven Koch, co-chairman of global mergers and acquisitions at Credit Suisse First Boston.

"It gets even more complicated when the client is associated with a country's national interests," Koch added.

Goldman Sachs knows this lesson well. It has spent the last several years zealously courting Chinese government officials. Indeed, while Goldman is advising CNOOC (as are JP Morgan Chase and NM Rothschild & Sons), it could have represented Chevron, the more likely winner in the Unocal fight. Chevron's star energy banker, William Wicker, was once president of Texaco, which became ChevronTexaco and is now Chevron.

Goldman's decision to pursue working for CNOOC was a calculated one. It knew full well that CNOOC had a long shot of winning. As adviser to the losing side in the takeover fight, Goldman would make virtually no money for its months of strategizing and number-crunching all-nighters.

But for Goldman, it may have looked like a no-lose situation. If CNOOC won, it would be a watershed deal that would reap millions of dollars in fees for Goldman. But being on the losing side would offer rewards, too. The experience itself has already helped Goldman build deep relationships inside the Chinese government that may give it a leg up in the coming years.

Goldman, in particular among Wall Street firms, has had to make some difficult strategic decisions involving its long-term loyalties and short-term profits. Last year, in what turned into a heated debate within the firm, Goldman chose to advise NTT DoCoMo, the Japanese telecommunications company, instead of another longtime client, Vodafone, the world's largest mobile phone company, in the auction for AT&T Wireless.

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