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It probably won’t be long before the name Wheelock NatWest is forgotten. Many outside Hong Kong will not even know it existed. A brokerage, with a corporate finance arm and a fund manager attached; capitalized at $125 million, with 250 staff, and seven offices across Asia; it did virtually nothing in two and a half years. It has only one major point of interest. Former employees say it was as good as destroyed by one of its own shareholders, NatWest. It provides a good example of the pitfalls of joint ventures, especially in a difficult region like Asia. A joint statement in November by the two partners, NatWest Markets and Wheelock, a Hong Kong property conglomerate, said that the joint venture was wound up because of “a number of changes in the industry, and in the overall regulatory environment”. However, it is clear that regulatory barriers were not the real problem. “We entered the joint venture with a long-term view in mind,” says John Howland-Jackson, chairman of NatWest Markets Asia. “And Wheelock fulfilled all their obligations and contributed whatever they could. But things changed in the world of NatWest Markets.” What changed? “NatWest Markets has changed and is a successful organization today,” says its chairman, Martin Owen. “People actually queue outside our door now. The very best in the world want to work for us.” In May 1994 when it signed up with Wheelock this was not the case. In Asia the firm’s reputation was terrible. County NatWest, the bank’s previous incarnation, had lost money in the early 1990s both in Japan and Hong Kong. Both operations were shut down as was Singapore. In Hong Kong there were recriminations at the sudden loss of 60 jobs. It didn’t look as if anyone would take NatWest seriously if it ever came back. But with Asian equity markets booming in 1993, NatWest Markets decided to renew its presence in the world’s highest growth region. In the early part of 1994 the Berwick Group, a consultancy firm, was given the task of getting NatWest back into Asia. Nicholas Sibley, the recently appointed head of Wheelock’s financial division, Wheelock Capital, and an old Hong Kong hand, was sounded out over lunch by an old friend at Berwick. The former head of Jardine Fleming and BZW Asia wasn’t instantly keen but struck up a good rapport with Simon Meredith-Hardy, his opposite number at NatWest Markets. The joint venture was announced in May 1994. The choice of Wheelock wasn’t as random as it at first might seem. Peter Woo Kwong-ching, the head of the Wheelock conglomerate, and one of three remaining candidates for the post of chief executive of Hong Kong after the handover to China, likewise had a special connection with NatWest he was a founding member of its international advisory board. The rationale was simple. Wheelock, the 149-year-old property-to-retail conglomerate with an annual turnover of $13 billion, is one of the most important Hong Kong Chinese companies. It would give the venture credibility, persuade clients NatWest Markets was not about to repeat its disappearing act of the early 1990s and lend its name to the recruitment process. Sibley was to be Wheelock’s day-to-day point man the experienced pair of shoulders who could swing almost anything over a lunch and go the extra mile over dinner. Howland-Jackson, Owen’s deputy, was to liaise between London and Hong Kong. Premature congratulation Those who were cynical about whether the agreement between them would come to anything watched as the summer passed and a chief executive failed to be appointed. A full five months later, David Miller came from US bank State Street to take on the post. He and Nick Sibley knew each other from Jardine Fleming, where Sibley had made him head of Tokyo. “We have positioned ourselves as a major house in the restructuring of corporate China,” Miller told Euromoney‘s special Asian issue in February 1995. China was the theme. Meocre Li, Arthur Andersen’s former managing partner in China, became the firm’s corporate finance head. His accountancy background gave him good access to Chinese companies. It looked a clever hire. The staff count grew quickly. There were 90 employees in October 1995, and by the time the joint venture was dissolved in October 1996, there were 250. Two to three months before the end, an inner circle of Hong Kong gossips sensed it was coming. But the public face of Wheelock NatWest was buoyant to the end. As recently as July, Miller commented: “My job is to build an innovative and powerful force in Asian investment banking, and there is a three- to five-year building phase.” Wheelock chief executive, John Hung, said the company was in it “for the long haul”. And so, it seemed, was NatWest Markets. It had achieved its aim of getting back into Asia. And even snatched a brief moment of glory, with the $135 million IPO spin-off of Concord Land its first major lead managership. But ironically the deal’s launch came almost simulataneously with the announcement that the joint venture was to end in divorce. The joint venture created in nine weeks by Sibley and Meredith-Hardy fell apart almost as quickly. “It was moving very rapidly in a direction of not just research and broking but becoming very capital-intensive and particularly risk-intensive,” says Owen. “Frankly we never do risk-intensive businesses outside of our own structure for control issues irrespective of who our joint venture partner is.” Wheelock had been led to believe otherwise. As far as it was concerned, NatWest’s $250 billion balance sheet had always been part of the Wheelock NatWest equation. The $125 million of paid-up capital was regarded as a token amount to be leveraged off the bigger prize in London. But it gradually emerged that the UK partner’s balance sheet would be selectively available. Early on the omens were bad. A team of traders was hired in July 1995 in accordance with the business plan. Ross Reason, former head of equity derivatives and trading at SG Warburg, brought two colleagues and expected to sit down and start to make some money. Miller commented at the time: “Our senior management takes every opportunity to employ the best people in the business.” But what use are the best people in the business if they can’t work? NatWest Market’s management’s approved the appointments. But a turf war soon erupted in London. The risk management people were concerned about loaning out the NatWest balance sheet for Reason’s derivatives activities. Reason and his team were given a bureaucratic barrage of excuses and, to their horror, no computer systems. This despite the joint venture agreement which specified that the UK bank would provide all the systems and audits Wheelock NatWest would require. With no systems Reason couldn’t trade. Exasperated, the Wheelock NatWest management intervened personally with Martin Owen. Owen recalls there were faults on both sides and does not deny that he was forced to “review pockets of potential politics”. Although there was undeniably a period of six months in which the traders lacked computer systems, part of the problem, he says, was that Reason’s team were poor articulators of what they wanted to do. They lacked familiarity with NatWest’s internal processes for obtaining trading limits, and also lacked a knowledge of the sort of robust systems they required. Should it not have been NatWest’s systems people who figured out such technical details? “This takes time,” says Owen. “And it took six months for them to articulate what they wanted to do. They wanted to do reasonably exotic things and these systems had to be tailored.” Owen adds that the scale of the trading Reason’s team envisaged was beyond anything that was in the business plan. Wheelock NatWest completely missed out on a bull market in the warrants business in the last quarter of 1995 and the opening quarter of 1996. Owen authorized a couple of deals personally, but the warrants business cannot be easily transacted through a chief executive in another time zone. In the end, specific individuals were given “limited” authority to trade. But Reason left in early 1996. “The issue we have struggled with post-Barings,” says Owen, “is how do you demonstrate clearly in an autonomous arms-length business how risk is controlled where its principal controls are through board meetings once a month.” Wheelock NatWest, he says, was not even an acceptable counterparty in the derivatives market. All of its trades had to be done back-to-back with NatWest Financial Products. It was clear from this early stage that the joint venture wasn’t working out quite as both parties envisaged. In NatWest’s Markets’ Broadgate headquarters, other acquisitions focused the minds of Owen and his senior management. Among these were M&A boutique Gleacher in 1995, and US bond house Greenwich and UK corporate advisory Hambro Magan in 1996. But NatWest’s decision to buy fund manager Gartmore proved more than just a diversion. Wheelock NatWest had its own fund management business. By the time of its demise, Wheelock NatWest Investment Management had been managing $600 million, the bulk of which came from the partners (including Wheelock’s pension fund) and $200 million from Japan. A fund manager too far The poaching of Nigel Wightman in June 1995 was controversial. The Asia Pacific chief executive of Rothschild Asset Management brought eight fund managers with him, leaving Rothschild in tatters. His brief was to build the Asian business on behalf of Wheelock NatWest and NatWest Markets whose Asian investment management team had just transferred across to the joint venture. Wightman had been told that NatWest might acquire a domestic fund manager in the UK, but this would only “add value” to the existing business. He was led to think that NatWest Markets was committed to growing its on-the-ground Asian fund management business. All but two of his ex-Rothschild team were already in the firm’s NatWest Tower office in Hong Kong’s Causeway Bay. The final pair had less than a week left on their gardening leave when news broke in February that NatWest was buying Gartmore, the London-based global fund manager. It didn’t take them long to realize they had no job to go back to. NatWest executives in Asia were surprised by the Gartmore acquisition. Martin Owen and Gartmore’s chief executive, Paul Myners, handled the negotiations personally. Owen says the deal was concluded in less than 10 days. Secrecy did not permit word of the ongoing negotiations to be passed on to the joint venture since both were public companies, and stock exchange negotiations forbade it. However, Owen does say the Hong Kong joint venture was told 24 hours before the announcement was made public. What immediately alarmed Wheelock was that NatWest had bought a fund manager that had an extensive Asian business of its own. Gartmore had a Japan fund (with £73 million under management), a Pacific growth fund (£127 million), and a dedicated Hong Kong fund (£23 million). With the exception of Japan, all of Gartmore’s funds are managed from London. Myners had worked with the joint venture’s Wightman at Rothschild in the early 1980s. So Wightman had no illusions about the future. Myners’ style is independent, as is Gartmore’s. Gartmore is an organization that has a philosophy of keeping all of its staff in London, and managing the funds in a distinct Gartmore style. Myners had told his buyer that the business would be left alone. (This was confirmed by Owen’s November reorganization. It was announced that Gartmore would have a separate operating committee and that Myners would report directly to Owen.) Wheelock NatWest chief executive Miller and fund management head Wightman went to London. They asked whether Gartmore’s Asian funds would be farmed out to the joint venture. Myners looked over to Owen. He said no. “Gartmore’s philosophy is that all fund management remains in London,” Owen told Euromoney, “If you pack funds off to Wheelock NatWest that is a different philosophy.” These philosophies, he says, are conflicting. But there wasn’t room for two NatWest-linked fund management businesses in Asia: Gartmore and Wheelock NatWest. It would confuse clients, as Owen puts it, to have “two centres of fund management excellence competing for business in the region”. One would have to go, and since NatWest had just paid £472 million for Gartmore it was quite obvious which. Wheelock was bemused. Did it have any say in the closing of its own business? The joint venture agreement was inspected. It was a document of 30 or so pages, strong on procedure how often board meetings will be held and the like but vague on details regarding mutual commitments. Sibley, the deputy chairman of Wheelock NatWest, had been involved in drawing up the agreement. But his view had been that if you had to resort to reading the agreement, the joint venture was over anyway in spirit if nothing else. What’s yours isn’t mine The two shareholders had set out with the assumption that anything in Asia was the joint venture’s. On the specific subject of fund management this included Asia-targeted funds generated from institutions in London. However, the joint venture agreement was flawed. One of NatWest’s London-based index-funds was Japan-targeted, and therefore NatWest couldn’t sign any agreement that guaranteed all Asia-linked funds out of London would go to the new joint venture. Its index fund business was too profitable. Both sides, however, had already agreed during internal meetings to give Wheelock NatWest Investment Management a broad mandate that in practice comprised London. This all smacked of formality and since neither partner wanted to stall the process, the written agreement therefore mentioned only the joint venture’s exclusive right to manage funds collected in Asia itself. NatWest took legal advice on this point, and lawyers said it did not contravene the letter of the joint venture agreement. Immediately following the Gartmore acquisition, Wheelock boss Peter Woo pressed his case. He wrote a polite letter to NatWest chairman Lord Alexander stating his concerns about the unsuitability of the Gartmore acquisition in respect to their Asian fund management business. He received a reply from Alexander stating he would look into it. Nothing happened, so a second letter was sent. Woo eventually ordered a meeting. In April he arrived in London with Sibley to meet Alexander and NatWest chief executive Derek Wanless. He explained the position, and requested the fund management issue be resolved to his satisfaction. Both Woo and Sibley departed for Hong Kong with the impression it would be. It was not. Instead NatWest hired financial M&A boutique Phoenix and tried to find a buyer for Wheelock NatWest Investment Management. But after limited interest in the US this came to nothing. The fund management business was quietly closed in October, and the Rothschild team, so expensively hired, was paid off and fired. “I’m sad we’ve disrupted their lives,” says Howland-Jackson. “It is not good practice.” “I became puzzled that Gartmore became so emotive an issue,” says Owen. “But I was sitting in a different place. My mind was in Europe.” Such misunderstandings appear to have permeated the joint venture throughout. By the summer their pace accelerated. The five executive directors of Wheelock NatWest were still waiting for NatWest Markets to sign off on the long-term incentive scheme, which was to comprise a substantial part of their pay. Wheelock had agreed to this back in December 1995. All five, which included John Williamson, NatWest’s former head of custody, talked of resigning, but concluded it would be a betrayal of the staff they had hired. Matters ought to have improved with the relocation of Howland-Jackson, Owen’s deputy, to Asia. Howland-Jackson had been the venture’s staunchest ally in London. But his arrival in August coincided with news that NatWest Markets had hired Steve Yamane from Morgan Stanley a trader whose epitaph could be “The man who finally broke Wheelock NatWest”. Yet again NatWest Markets had failed to inform the joint venture of its new hire, who would head Asian equity trading and derivatives. It was another fait accompli. NatWest Markets had unilaterally decided to take Asian trading out of the joint venture’s sphere of influence and put it in NatWest Markets. The press release made no mention of Wheelock NatWest. It was as if it didn’t exist. Wheelock NatWest would not be viable if trading was pulled out. What lay behind this change of strategy was the arrival in June of Tom Whelan. A former Morgan Stanley head of equity derivatives, he was hired by Owen to take charge of global equities. His hires in Tokyo reflected his intention to generate revenues from proprietary trading in Japan. The joint venture agreement never prohibited NatWest Markets from trading in Asia. But NatWest Markets could only trade with other marketmakers. The joint venture agreement didn’t allow NatWest Markets to go near client business. Wheelock sources suggest NatWest wanted the client flows, to run its proprietary trading more effectively. Yamane’s Tokyo operation therefore violated the joint venture agreement.
Owen came to Hong Kong and met with Peter Woo. It was not a pleasant meeting. According to accounts circulating in Hong Kong, Woo was not prepared to watch NatWest treat him in the same fashion as it had done over Gartmore. Apparently he banged his fist on the table at one point. He also used what has since been called the He pointed out that the joint venture agreement had been violated and threatened legal action. It was clearly the end of the relationship. All that was left was to figure out how much it would cost to buy out Wheelock’s 50% share. The figure will appear as an exceptional item in Wheelock’s end-of-year accounts, and it is hinted that it is substantially more than if the conglomerate had just banked its capital. The public announcement of the break-up had to be delayed till the payment could be voted at a full NatWest board meeting. A heated discussion is said to have taken place over the figure. Ironically, the Hong Kong press reacted to the news on November 5 by savaging Wheelock. Conglomerates analysts in Hong Kong accused the company of yet another failed joint venture to add to the tie-up with Richard Branson’s Virgin group, which was signed in February 1994 but hasn’t left the drawing board. They pointed to the hype. Wheelock had claimed the joint venture would help finance projects all over China thanks to NatWest’s financial expertise and Wheelock’s contacts. What projects? What contacts? Had any materialized? Analysts noted that Wheelock had also said it would turn Wuhan into the “Chicago of China”. Four years later plans for a container terminal, a commuter rail system and a power plant have come to nothing. Woo made himself available to host functions, or to take part in meetings at the Chinese Central Bank. But his political ambitions prevented him travelling round China with the corporate financiers which would have been difficult even without the political ambitions. The Wheelock name, it is true, did not bring too many deals, although it is rumoured in the market that its Philippines connections have helped it (whatever it will be, when NatWest settles on a name for the revamped Asian business) to win a lead role in the public offer for Philippines Nickel. Hope over experience Sibley’s attempt to build a Jardine Fleming of the 1990s before he finally leaves Hong Kong’s shores in February 1997 to retire, received censure, even from friends. “You never step in the same river twice,” one said. Unlike Jardine Matheson, the conglomerate which tied up with Robert Fleming (two Scottish houses), Wheelock was not engaged in much corporate business of its own. When Jardine Fleming was formed it was immediately thrown into the fee-paying hostile takeover of Dairy Farm by Hongkong Land (a Jardine company). Such transactions provided the backbone for Jardine Fleming’s expansion across Asia. Where does the failed joint venture leave NatWest Markets in Hong Kong? Owen is bullish: “Asia is more relevant to us than it was five years ago. We understand it better, we understand the risks of the region better and we have much better people working for us.” However, Owen has made clear that product centralization will be instituted for the sake of greater efficiency. Reporting lines will go into London. Integration will occur. Some already have. One rival syndicate head laughs that he has been invited on a junk-boat trip to meet NatWest Market’s London head of syndicate. What has NatWest bought? The 250 staff are of varying quality. Among those considered top-notch are the likes of Philip Mok, formerly BZW’s top-rated head of Hong Kong research, who brought a whole team with him, and is known to be good at training new recruits. But with only about $95 million of capital consumed (the venture had $30 million left of the $125 million it had drawn down) the process of building has proved dramatically less costly than the $3 million-a-head price tag for Gleacher. What of NatWest’s reputation? “This place is a village,” says one Hong Kong financier. “Overall NatWest probably did the right thing. But everyone who does business with them now sends negative signals to Wheelock. I’d say this has set them back five years in Hong Kong and China.” The business focus, however, has changed. China is no longer the clarion call. “Japan is our single biggest priority in the region,” says Howland-Jackson. “That is not to decry the importance to us of China, India or South East Asia.” |
