Taiwan ITCs look open to sale

Fund managers and analysts in Taiwan speculate that several prominent investment trust companies are being purposefully left out of financial holding companies as a lure to potential foreign acquirers. Financial holding companies become legal in Taiwan as of 1 November.

Capital Securities Investment Trust is to be excluded from a new financial holding company being formed by China Securities and Cathay Life, while National Investment Trust is likewise in the cold from the financial holding company being arranged following Bank Sinopac's acquisition of National Securities.

These moves strike observers as curious. The point of a holding company is to amalgamate all the key financial services, such as banking, brokering, insurance and asset management. Both Capital and National's money management arms have large, profitable Securities Industry Trust Enterprise (SITE) businesses, which allows them to sell and market onshore mutual funds.

A fund manager outside the holding company may still be owned by constituents in that holding company, and can still try to cross sell products, but as one analyst puts it, "If a SITE is outside the holding company, it's not a cozy arrangement. A foreigner can pick it off."

Which may be the point. Earlier this year HSBC and Invesco acquired domestic SITE businesses (China Securities Investment Trust and Grand Cathay, respectively) at high valuations. Last year ABN AMRO bought Kwang Hwa. One analyst says the going rate for these deals has been 7% of assets under management plus NT$80 to NT$85 per share, a hefty premium for market access, the SITE license, goodwill and indirect access to mainland China.

The belief is that Capital and National hope they can attract similar pricing, and then later launch new investment trust companies within their holding companies. This strategy would assume these firms consider the work involved in starting a fund management business from scratch, or buying a local competitor's, is little compared to the profits of selling a SITE business to a foreigner. For example, a back-of-the-cocktail-napkin calculation suggests National could raise up to $100 million offering a majority stake in NITC. Capital, which is rather larger, presumably could command more.

Other observers say this strategy has holes. First, asset management is a core service. Securities firms, particularly those building a holding company structure, cannot treat them so casually. Furthermore, Capital and National have successful businesses that would not be easily or quickly replicated.

Furthermore, NITC's existing ownership structure poses problems. It is Taiwan's only listed investment trust company, with 15% free float, about a third of which is held by foreign investors. The controlling Hong family holds 30% and the senior management owns 55%, meaning these parties would have to surrender a lot to entice a potential foreign acquirer.

The other leading money manager that analysts believe is up for grabs is International Investment Trust. It has a good pedigree in Taiwan as a pioneer, but is mostly held by KMT money, which complicates any sale with politics.

But demand should not be a problem: there is no lack of foreign asset management firms keen to enter Taiwan. The question is, particularly in light of the disappointing discretionary management business, whether Taiwan ITCs are worth the hefty valuations.