Hardly a day goes by without Taiwan’s technology industry being courted by foreign governments. As the west seeks to secure its supply chains against disruptions and the growing power of a rising China, the politically-isolated country — home to roughly 90 per cent of the world’s advanced chip production — has gained a seat at the table.
But back home, a major chunk of the economy dances to a very different tune. Taiwan’s financial sector is still overbanked despite a 20-year-old effort at consolidation with some 38 domestic banks. Local family clans and government-controlled institutions continue to call the shots.
That reality has been brought into sharp relief by the collapse of the proposed merger between local financial holding company IBF and Entie, a domestic bank owned by private equity fund Longreach, which is based in Japan and Hong Kong. The deal valued Entie at NT$33.7bn ($1.08bn).
“The failed merger is a canary in a coal mine,” said Chris Cottorone, president of TriOrient, an Asia-based private investment company and co-chair of the private equity committee at the American Chamber of Commerce in Taiwan. “M&A activity — particularly involving foreign private equity — has been lagging compared with other markets around Asia. This indicates an unwillingness on the part of foreign institutional investors to enter the market.”
Longreach took that step with its 2007 acquisition of Entie, but is regretting it now.
After two earlier attempts to negotiate an exit ran aground, a sale to IBF seemed within reach when a majority of board members and shareholders at both institutions approved the deal late last year. But then family-owned conglomerate Nice Group, an IBF minority shareholder which voted against the merger, filed a legal complaint to stop the deal. The financial regulator paused its review, noting the pending legal action and the fact that almost half the IBF board had voted against it. Last month, Taiwan’s Commercial Court ruled that the deal could go ahead. But the verdict came just one day before the year-long deadline for closing the deal expired.
“Longreach has a very significant amount of capital, including US pension plans and endowments, who ask what is going on, we have been stuck in Taiwan for 15 years. In terms of economic effect, it’s expropriation,” said Mark Chiba, chair and partner of Longreach Group.
One factor complicating the deal was that IBF is seen as close to the Kuomintang, Taiwan’s main opposition party, and that its largest shareholder is Want Want, another family-owned group with deep ties in China. When the IBF board voted on the proposed deal last year, representatives of government-owned financial institutions sided with Nice in opposing it — a move some investors interpret as a government attempt to stop Want Want from gaining more influence in the financial sector.
“Taiwan needs to systemically embed itself in the global economy, other than through TSMC,” Chiba said, referring to local chip giant Taiwan Semiconductor Manufacturing Company. “Yet you have a banking and financial system that is still a conduit for domestic political interests and disputes. What kind of message does that send?”
It is not the first bank merger to run into hurdles. Taishin, one of Taiwan’s largest financial holding companies, tried for years to acquire state-owned Changhwa Bank, but finally gave up after a merger once viewed as a done deal came under renewed scrutiny following a change in government.
“Political risk discourages bank owners from even trying for mergers,” said Patrick Chen, head of research at CLSA in Taipei. He added as banking increasingly moved online, branches of banks became less and less valuable to rivals. There is also little pressure for potential targets to agree a deal either because the risk of bankruptcy is low.
In that situation, government shareholders concerned about job losses and family conglomerates that prefer retaining influence on a small institution over a diluted stake in a bigger bank are most content with the status quo.
But that status quo does Taiwan’s broader economic interests a disservice: In stark contrast to neighbouring economies such as Japan, South Korea, Singapore and Hong Kong, the country lacks a global or even regional bank that could accompany its industry in an imminent internationalisation push.
“Global supply chain reshuffling is prompting many local firms to expand their manufacturing into new markets,” Cottorone said. He added that if foreign institutional investors were not able to help Taiwanese banks grow to play that role, “it may limit Taiwan firms’ ability to expand internationally”.