Cantor's China dream

Further evidence of the fact that Asia and particularly China are firmly on the radar screen, came recently when Cantor Fitzgerald announced a strategic alliance with HankPacific Group, an independent international merchant banking and advisory business focusing mainly on China. The US broker has allied with a firm that is run by the influential Henry Liu - who previouslhy served as a senior financial and capital markets regulator in China, including in the role as Director-General and General Counsel at the China Securities Regulatory Commission (CSRC).

Liu also served as a Managing Director and Head of Investment Banking for China at DLJ. But what brings Cantor to China and why does it think it has a model that will differentiate it from its many competitors in the China investment banking sphere? We spoke to Cantor's global head of investment banking, Marc Blazer and Henry Liu about the alliance.

Can you talk about why you did this deal?

Blazer: We decided to enter the Chinese investment banking business, because we felt there were some macro issues that made now the right time to do this. We needed someone who could be on the ground, that had local contacts with regulators and corporates. We discovered when we talked to clients that most of our competitors simply parachute people in. With Henry - who some of my colleagues have known for a couple of years - what I learned and heard was that he was someone who had the contacts to make things happen and open doors. We knew that's what we needed.

Liu: Cantor Fitzgerald has one of the strongest global distribution platforms and is a great name on Wall Street - and when we spoke to the Chinese clients, they knew all about Cantor Fitgerald's strong execution capabilities. What HankPacific offers here is an indigenous, on the ground presence. I feel we are very strong in the Chinese market, and will get results.

What is the focus?

Liu: We're not trying to be all things to all men. We will stay focused on what serves the best interest of the clients.

Blazer: Cantor has a middle market focus - which is not to say we won't do deals with large corporates. But we see an opportunity because our major competitors such as Goldman Sachs and Morgan Stanley are really aiming to win the business of the large corporates. We think the opportunity is to focus on the small and mid-cap sector because the feedback we have received is that they are starved of advice. They say the big boys either over-promise results or pay no attention to them at all. We have already made a niche for ourselves in that space in the US and Europe and now we want to do the same in China.

Historically, Cantor Fitzgerald has been an interdealer broker. How old is your investment banking division?

Blazer: We started the investment banking group at the end of 2000. It was initially focused strictly on the US. It was really designed as something to leverage the trading platform.

In the US Cantor is the largest third market equity trading firm, and globally we cover 5,000 institutions. In Asia, the office has only been open just over a year and we are already number one in over-the-counter equity derivatives - so we've made big inroads in a very short time.

This trading platform allows us to match buyer and seller and that lends itself well to an investment banking business. Likewise we felt our competitors were focused on the largest money managers - the top 150. If you are trying to place a small deal with an unknown company, and you are hoping that one of those 150 buys it, you are not going to get the deal done.

We have so many more relationships, whether with a five man hedge fund managing $250 million in the US, or a three man hedge fund in Geneva. In aggregate these guys manage an enormous amount of money but don't always get the opportunity to play in deals. They put in their allocation, and if they get anything at all they get a tiny participation. On the other hand, we talk to these people and get results for them.

For example, we did an IPO last year for a company called Top Tankers. It was a tiny shipping company, that had five ships before it went public. The use of proceeds was to increase the fleet to 17. They are a young management team with a 32 year old CEO.

People in the shipping industry and the finance industry thought this deal couldn't get done. We priced the deal on the week of July 23, which was the worst week in the markets last year. Four other IPOs were withdrawn.

We priced, and it turned out to be one of the best performing IPOs of last year. And three months later we took the company back for a follow-on offering, which doubled the size of the company. Without being able to have a bookbuild of 175 institutions, this deal wouldn't have happened.

If you were only talking to the top fund houses this deal would have died. So we feel that particularly for emerging market issuers and smaller issuers - that have compelling growth stories - this is a terrific platform.

We also have much more flexibility in how we get deals done. We don't have 10 deals a week, which means it's immaterial if one of them fails. For us, every deal has to happen. If one deal fails we can forget this business. So there is a senior management focus on making sure deals happen.

Another example was, again, a shipping deal we did which was heavily oversubscribed and it would have led to problems of allocation. So we spoke to the company and also to some lead investors and the night before we decided to double the size of the deal from $110 million to $237 million. That's the kind of flexibility we have.

Is that your target deal size?

Blazer: We normally target deals of between $75-100 million.

How many deals will you hope to do out of China per year?

Blazer: In the short run if we do two or three deals a year, we can all call this a success. There is an awful lot of lead time between talking to a company and making the deal happen. We are already in discussion with a couple of issuers and we're hopeful we can put a couple of deals together.

Liu: Plus there's M&A. We are already working with a couple of big US companies keen to make acquisitions in China. Plus some of the top tier resources companies in China are asking us to show them ideas.

Blazer: The advantage we have with inbound M&A is Henry's contacts. Every public company in China has had to go through the CSRC and so Henry has had dealings with them.

Liu: The other thing is being able to identify a shortlist of companies and be able to find out really true information about them. I have cumulative experience of dealing with Chinese companies and have been giving advice on multinational acquisitions in China since the early 90s. I know how companies are run in China and how decisions are made - depending on who the stakeholders are. That is a big advantage.

We will focus on M&A situations where legal person shares can be sold to foreign multinationals or financial investors.

What will be your approach to research?

Liu: We have in-house research capabilities. We have some unique special access to sources of information. We will get the best information possible to help clients. What we tend to produce is strategic research, which is more geared to M&A than equity-style research.

Blazer: We are hiring a director of research in the US and research salespeople. The research product will be geared towards US investors.