Bear Stearns Cos and China's Citic Securities Co (中信證券), a top state-controlled investment bank, agreed on Monday to invest US$1 billion in each other and combine some operations in Asia, giving the US brokerage an entrance into the Chinese financial sector.
The deal comes amid speculation that Bear Stearns might seek a partner following the summer's credit crunch, which took a toll on the firm's earnings.
The investment is the biggest of its kind between a US and Chinese financial institution.
"This groundbreaking alliance will give Bear Stearns a unique footprint in one of the world's fastest-growing economies," Bear Stearns chief executive James Cayne said in a statement on Monday. "Combining our operations in Asia with Citic Securities will greatly benefit Bear Stearns' global client base and generate substantial new revenues."
The deal, which also calls for Bear Stearns to invest US$1 billion in Citic, would pool together both firms' businesses in Asia, with the exception of China.
The venture, however, would include some collaboration in China, giving Bear Stearns access to some of Citic's clients.
The transaction would give Bear Stearns a strong foothold in Asia, where it has been weak, and may help it catch bigger rivals such as Goldman Sachs and Morgan Stanley.
Citic will invest in Bear Stearns through 40-year convertible trust preferred securities that will convert to about 6 percent of Bear Stearns' outstanding shares, the statement said. Citic could potentially increase the stake to 9.9 percent.
In turn, Bear Stearns will acquire a similar stake in Citic through a six-year convertible debt security. Bear Stearns will also have options to acquire additional shares.
The pair will form a joint venture based in Hong Kong that will offer capital markets services across Asia. The 500 bankers, traders and analysts Bear Stearns employs in Asia will join the 50-50 venture.
Still, the venture does not directly address Bear Stearns' balance sheet. Some investors and analysts have suggested that the firm could require a capital infusion because of its high exposure in the mortgage market. But Bear Stearns has often said such an infusion is not necessary, and its deal with Citic seems to be an expression of confidence in Bear Stearns.
The firm's exposure to the mortgage market was highlighted in its third-quarter results. It had net income of US$171.3 million, or US$1.16 a share, down from US$438 million, or US$3.02 a share, in the quarter a year earlier. Earnings fell 61 percent on sharp losses related to its hedge funds and exposure to subprime investments.
The two-way nature of the alliance was a surprise to some analysts. Brad Hintz, an analyst with Sanford C. Bernstein, said the pact is more important to Citic in the long run as it evolves into a more global competitor.
"Bear Stearns will get more profit out of their Asian operations," he said. "Over the long term Bear Stearns will end up with a credible competitor who will have learned global finance from Bear Stearns themselves."
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