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on september 10 and 11, guotai junan chairman zhu jian and haitong securities chairman zhou jie responded to the merger between the two parties at the company's 2024 semi-annual performance briefing.

"the reorganization of guotai junan and haitong securities aims to respond to national strategies and promote the creation of a first-class investment bank, which is in line with the strategic development direction of the two companies." "this reorganization is to respond to national strategies, help both parties share resources, complement each other's strengths, and enhance core competitiveness."

on the evening of september 5, guotai junan securities and haitong securities suddenly issued a suspension announcement, saying that they were planning a major asset restructuring. the announcement stated: "guotai junan will absorb and merge haitong securities through a share swap."

guotai junan securities and haitong securities are both leading securities firms. based on the 2023 annual report data, the total assets and net assets of the new institution after the merger of the two companies reached 1.68 trillion yuan and 330.2 billion yuan respectively, both ranking first in the industry, which also set a record for industry mergers and acquisitions.

in march this year, the china securities regulatory commission issued the "opinions on strengthening supervision of securities companies and public funds and accelerating the construction of first-class investment banks and investment institutions (trial)", which put forward the goal of building industry institutions: by 2035, 2 to 3 investment banks and investment institutions with international competitiveness and market leadership will be formed.

after an unprecedented “trillion-level” merger, how far are my country’s securities firms from becoming world-class investment banks?

devour

in 1992, the china securities regulatory commission was established. guotai securities and junan securities were born in the same year. guotai junan was the result of the merger of the two in 1999. haitong securities has not changed its name since its establishment in 1988. it is also the only large securities firm that has not received government capital injection and has not been acquired and restructured.

if we extend the time dimension to ten years ago, according to wind data, haitong securities and guotai junan securities were almost ranked in the top three in the industry in terms of operating income and net profit at that time. except for the first place citic securities, these two securities companies took turns switching between the "second" and "third" positions.

however, both have been "disappointed" in recent years. taking operating income as an example, haitong securities fell to seventh in the industry in 2022, and further fell to tenth in the first half of this year; guotai junan was also overtaken by huatai securities in 2023, and was surpassed by galaxy securities in the first half of this year, and its ranking dropped to fourth.

the merger of the two also has a "genetic" basis. guotai junan securities and haitong securities are both financial institutions under the shanghai state-owned assets management co., ltd., and their actual controllers are the shanghai state-owned assets supervision and administration commission.

tianyancha app shows that shanghai state-owned assets management co., ltd. holds 21.35% of guotai junan securities, making it the largest shareholder. shanghai guosheng (group) co., ltd. holds 6.6% of haitong securities, also one of its largest shareholders; shanghai guosheng (group) co., ltd. is a 100% controlled enterprise of shanghai state-owned assets supervision and administration commission.

throughout the history of the development of china's securities industry, there has never been such a case of "leap" directly brought about by the merger of guotai junan securities and haitong securities.

this is the largest a+h bilateral market absorption merger in the history of china's capital market and the largest a+h integration case of listed securities companies. according to estimates by international institutions, this reorganization is the largest m&a project in the international investment banking industry since 2008.

by 2023, the total operating revenue and net profit attributable to the parent of the new merged institution will reach 59.1 billion yuan and 10.4 billion yuan respectively, ranking second in the industry after citic securities.

picture/guotai junan securities official website

"the two brokerage firms are of comparable size. based on the 2024 interim report data, after the merger, the brokerage business's net income ranking will remain second, and the asset management net income ranking will rise to third. in addition, guotai junan has the primary trading qualification for over-the-counter derivatives, which can improve the efficiency of fund use after the integration; mid- and back-end investments such as r&d have economies of scale." kaiyuan securities commented.

xue hongyan, deputy director of the star chart financial research institute, told china newsweek that guotai junan securities and haitong securities are both industry leaders. their merger marks the beginning of the process of building an aircraft carrier-class securities firm through mergers and acquisitions and restructuring, and also opens up room for imagination for the restructuring of other leading securities firms.

tian lihui, dean of the institute of financial development at nankai university, also believes that the integration of guotai junan securities and haitong securities is a major event in china's securities industry, reflecting the trend of the securities industry towards scale and centralization.

in recent years, regulators have been encouraging the creation of aircraft carrier-class securities firms. the central financial work conference and the new "nine national regulations" also mentioned the need to build first-class investment banks. from the perspective of the path, the merger and reorganization of the leading securities firms "1+1>2" is the fastest path.

"this integration will help improve market competitiveness, optimize resource allocation, and enhance capital strength, thereby occupying a more advantageous position in domestic and international financial markets, building a first-class investment bank, and implementing the strategy of building a strong financial country," tian lihui told china newsweek.

labor pains

of course, the merger of two strong companies is not just a simple accumulation of assets. the formation of a super brokerage aircraft carrier is inseparable from the deep integration between teams, which also once triggered speculation about personnel flow from the outside world.

as of the first half of 2024, guotai junan securities and haitong securities had 14,762 and 13,346 employees respectively, totaling more than 28,000 people.

from a business perspective, guotai junan securities and haitong securities have some similarities. according to the 2024 semi-annual report, brokerage business is a relatively advantageous business for both securities firms, and the net income from investment banking business fees of the two is not much different.

from rivals to teammates, the merger also means that there is a period of adjustment, and changes in the organizational personnel level may be inevitable. there was once a rumor on social media that "the investment banking department of guojun and haitong will lay off 1,300 people after the merger."

tian lihui analyzed that the challenges of brokerage mergers in terms of business and personnel mainly include resource integration problems caused by business overlap and difficulties in integrating corporate cultures. in particular, personnel placement is a problem because the merger may lead to duplication of some positions, and it is necessary to properly handle employee emotions and social impacts. "the core of the integration is that both companies need to make internal structural adjustments to eliminate redundant departments while ensuring that the core business is not affected."

this may be more obvious in investment banking business. due to the current phased tightening of ipos, the size of the investment banking team does not match the business needs. as the acquired company, haitong securities' investment banking business is its advantage, which also makes some employees feel uneasy.

an employee of haitong securities told china news weekly that frontline employees received the news of haitong's acquisition almost as quickly as the outside world. the chairman of the group had held a meeting after the news was announced, but the employee said he "could not say" the specific content.

another haitong securities employee said that department leaders generally gave everyone encouragement in a "chicken blood" manner, "everyone work hard, and if you want to change jobs, you can. it would be even better if (the company) has no personnel turnover plan." although there are some rumors about the integration of relevant personnel outside, there is "no definite news" within the company. a leader said that "there will be a more concrete plan regarding the merger in about 25 days."

in addition to the issue of organizational integration, another focus of outside attention is the poor performance of haitong securities in recent years. according to the annual report data, haitong securities' revenue and net profit attributable to shareholders in 2023 fell by 11.54% and 84.59% year-on-year respectively, and its net profit in 2023 was even -311 million yuan. in 2022, its revenue and net profit fell by 39.94% and 48.97% respectively.

what is more noteworthy is the compliance issue. since 2020, haitong securities has been caught in a turbulent period, and has been involved in yongmei's default, haitong international's huge loss and other incidents. according to incomplete statistics, the regulator issued 229 fines in the first half of 2024, involving 50 securities companies. haitong securities was fined 9 times and its employees were fined 19 times, both ranking first in the industry.

on august 28, the website of the central commission for discipline inspection and the national supervisory commission announced that jiang chengjun, deputy general manager and chairman of the investment banking committee of haitong securities, who fled in july on suspicion of serious duty-related crimes, was arrested overseas and repatriated.

photo/haitong securities official website

xue hongyan pointed out that haitong securities' overseas business has suffered consecutive large losses in recent years, and its investment banking business line has also recently exposed major compliance risks. "the merger with guotai junan will help improve its risk control capabilities and compliance level, release potential risks, and make up for its shortcomings to a certain extent."

what is the specific cooperation plan after the merger? regarding the subsequent specific integration plan and business planning, zhou jie and zhu jian both said that the specific cooperation plan is subject to the transaction documents further signed by both parties. in addition, this reorganization still needs to go through the necessary internal decision-making procedures and must be approved by the competent regulatory authorities before it can be officially implemented. there is still uncertainty as to whether it can be implemented.

accelerate

in fact, mergers and acquisitions in the securities industry are continuing to accelerate.

since the beginning of this year alone, there have been seven mergers and acquisitions in the securities industry: "guolian + minsheng", "zheshang + guodu", "western + guorong", "ping an + founder", "pacific + huachuang", "guoxin + wanhe" and the latest "guotai junan + haitong".

in the new cycle of restructuring and mergers and acquisitions in the securities industry, two clear differentiation paths have emerged, including the "big fish eat the small fish" of small and medium-sized securities companies banding together for warmth, and the strong integration among the leading companies. looking at the development of the industry, under the guidance of the opinion of "cultivating first-class investment banks", this is also the fifth wave of mergers and acquisitions in my country's securities industry.

"the integration of the securities industry is indeed accelerating, which reflects the trend of deepening reform of the capital market and the regulatory authorities' requirements for cultivating investment banks with international competitiveness," tian lihui added.

however, large scale does not mean strong strength, and the construction of a first-class investment bank certainly cannot rely solely on mergers and acquisitions.

wang sheng, party secretary and chairman of china galaxy securities, once wrote that my country faces the following challenges in building a first-class investment bank:

first, the securities industry is small in scale and its functions are limited.

in 2023, the total assets of my country's securities industry were 11.83 trillion yuan, and the net assets were 2.95 trillion yuan; the total assets of goldman sachs group, morgan stanley, samsung securities, and nomura holdings were approximately 11.63 trillion yuan, 8.45 trillion yuan, 3.12 trillion yuan, and 2.75 trillion yuan, respectively. among them, the size of goldman sachs group is close to that of my country's entire securities industry.

second, securities companies lack comprehensive and differentiated operational capabilities.

on the one hand, my country's securities companies are still mainly engaged in traditional businesses, and the quality and efficiency of key businesses represented by investment banking still need to be improved. on the other hand, the businesses of my country's securities companies are relatively homogeneous, and their core competitiveness is relatively low. by the end of 2023, my country's brokerage business and proprietary business revenue will account for more than 50% in total, while investment banking business and asset management business will account for only 13.4% and 5.5% respectively.

third, the international business of securities companies has been developing relatively slowly, and it is imperative to accelerate their global layout.

in 2023, the top ten securities companies in my country achieved a total operating income of 300.239 billion yuan. among them, overseas business income was 30.996 billion yuan, accounting for only 10.32% of the operating income. there are only two leading securities companies with overseas income accounting for more than 20%.

fourth, the degree of digital transformation in the securities industry is relatively lagging, and there is still much room for improvement.

my country's digital finance developed earlier and is at the world's leading level, but the degree of digital transformation in the securities industry lags behind that of the banking and insurance industries, and there is still much room for further investment. according to iresearch consulting, by the end of 2022, the financial technology investment in the banking, insurance and securities industries will be 253 billion yuan, 45.1 billion yuan and 37.7 billion yuan respectively.

based on this, in the view of many experts interviewed, industry integration not only brings scale advantages for "becoming bigger", but also provides a solid foundation for the characteristic development of specific business segments and the enhancement of overall competitiveness.

from another perspective, the state-owned enterprise background of securities firms also gives profound meaning to their accelerated integration.

zhou lisha, research director of the institute of modern state-owned enterprises of tsinghua university, told china news weekly that from the perspective of the development of state-owned enterprises, guotai junan and haitong securities have integrated the advantageous resources of shanghai's financial state-owned assets through merger and reorganization to create a first-class investment bank that matches shanghai's status as an international financial center. "this will help optimize the layout of shanghai's financial state-owned assets and make state-owned capital stronger, better and bigger. the new institution after the merger will better serve the real economy and meet the diversified and personalized financial needs of enterprises."

xue hongyan bluntly stated that under the policy demand of building aircraft carrier-class securities companies and first-class investment banks, the road to domestic securities company integration has just begun.

references

"with more than 600 branches and over 28,000 employees to be arranged, what obstacles are there for securities firms to become "super aircraft carriers"? ", 2024-09-08, beijing business daily

"strictness is the top priority! regulators issued 229 fines in the first half of the year, involving 50 securities firms", 2024-07-07, securities china

"thoughts on building a first-class investment bank", 2024-08-23, tsinghua financial review