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Deal advice DIY by major Chinese firms threatens banks' rain making

HONG KONG (Reuters) - Fosun International Ltd 0656.HK, China's biggest privately-owned conglomerate, is known globally for its bold dealmaking, including the tenaciously successful pursuit of French resort operator Club Med.

A view of the headquarters of Shanghai Fosun Pharma Group in Shanghai, China September 13, 2016. REUTERS/Aly Song/File Photo

What is less known is Fosun’s reluctance to use expensive investment banks to advise on such deals. Instead, the Shanghai-based company has built a 400-strong internal investment team to advise on its global acquisitions, its assistant president Chen Bo told Reuters.

“When Fosun started its globalization strategy five years ago, we were nobody in the global business. We definitely needed investment bankers to introduce Fosun and lead us on the deals,” he said. “But today with the growth of the brand and strong [in-house] experts across the world, we don’t rely on any intermediates. We find the targets by our own team and negotiate with the owners of the potential assets directly.”

As some global investment banks shrink their Asian footprint, ambitious Chinese conglomerates such as Fosun and technology giants -- notably Alibaba Group Holding Ltd BABA.N and Tencent Holdings Ltd 0700.HK -- are beefing up in-house mergers and acquisitions advisory teams, hiring hundreds of bankers and other financial professionals to sustain their global dealmaking drive.

In some cases, the internal teams of Chinese corporations far outnumber investment bankers at global banks in Asia. Goldman Sachs GS.N, for instance, currently employs around 250 investment bankers in Asia, outside of Japan and Australia, following a recent 15 percent cut.

While it is normal for large western companies to assemble in-house M&A experts, they do mostly continue to use external advisers while executing large takeovers. The in-house teams in the U.S. and Europe also tend to be much more modest in size.

Investment banks are missing out due to Chinese buyers increasing reliance on internal advice. When Shanghai Fosun Pharmaceuticals Group Ltd 600196.SS acquired India's Gland Pharma for $1.3 billion this year, it did not use any external advisers. Similarly, when Chinese ride hailing firm Didi Chuxing bought Uber's China unit, all financial advisory work for both firms was done in-house..

“These Chinese companies have realized they are going to be serial acquirers and they might better do on their own rather than hiring a bank,” said Keith Pogson, EY senior partner for financial Services in the Asia-Pacific.

“With their own team, they can better manage their strategy, look for assets that fit their future worldwide, approach and acquire targets directly. They are basically short-cutting the whole process,” he added.

BIG NAME HIRES

Pogson did note that Chinese acquirers would eventually scale back their M&A splurge, and that this would make it difficult to sustain large in-house operations. There will be a point when having a very big in-house team “will be a handicap rather than help,” he said.

Fosun’s team is divided into 15 groups focusing on different industries spread across 14 countries, from the United States and Britain to Brazil and Russia. The team, made up mostly of industry specialists hired from retreating global investment banks, as well as multinational companies and other financial institutions, has about 240 managing directors worldwide, of which 101 are foreign, according to Fosun.

Elsewhere, Alibaba and its financial affiliate, Ant Financial Services Group, have also built their teams to 150 and 30, respectively, according to people familiar with the matter.

Alibaba and Ant Financial have lured a number of big name investment bankers, including Michael Evans and Douglas Feagin, two veteran Goldman bankers.

Tencent’s in-house M&A team has grown to about 50 people, and is led by its low-profile president Martin Lau, a former Goldman Sachs executive director, according to people familiar with the matter.

Alibaba, Ant Financial and Tencent declined to comment on the size of their in-house investment teams. Fosun, which has snapped up other global brands such as Canada’s Cirque du Soleil, has only paid about $44 million in M&A advisory fees since 2002, data compiled by Thomson Reuters showed. Among its top 20 outbound M&A deals, it only hired financial advisers for five.

Chinese in-house deals teams are also beginning to have some impact on investment banks’ revenues. Volume of China’s completed outbound and domestic M&A deals has increased by almost 80 percent so far this year to $404 billion, but fee volume only rose by about 40 percent, according to data from Thomson Reuters and Freeman Consulting.

“These internal teams in one way eat a bit of the fee pool because a lot of things can be done in-house instead of outsourcing to other banks, in particular in the tech sector,” said Jason Lam, president of China Renaissance Securities (HK), a boutique investment bank.

Freeman Consulting data also shows half of tech deals below $300 million by Chinese firms have been executed in-house so far this year, while external advisors have been engaged in the majority of larger tech acquisitions.

“For internet and technology companies, it makes a lot of sense to do these deals in-house,” said one Hong Kong-based Asia head of M&A at a global investment bank. “That’s because they are usually buying a private company. It’s just entrepreneurs talking, they don’t need a fancy valuation or fancy legal contract.” Yet, some bankers believe external advisors are here to stay especially for mega deals. “For big M&As, sometimes even you have a team, it’s better to have a middle-man to be the messenger,” said Lam of China Renaissance.

Reporting by Julie Zhu; Additional reporting by Denny Thomas, Elzio Barreto and Lisa Jucca; Editing by Denny Thomas and Martin Howell

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