(Bloomberg Opinion) -- In the end, the “insane asylum” got sedated.
CLSA Ltd. once earned that proud moniker from its former chief executive officer, Jonathan Slone, for its nonconformist research ideas. After a decade as CEO and 30 years at the brokerage, Slone this week became the latest and the most high-profile departure, closely following former Chairman Tang Zhenyi.
You can rightly blame the broader challenges facing the research industry, or a culture clash between a largely Western-run house and its Chinese state-owned parent, Citic Securities Co. But ultimately the mass exodus from what was once one of Asia’s top brokerages comes down to its mission: How do you publish independent analysis when your ultimate owner is a government with a tightening grip on your message?
Founded in 1986 by two journalists in Hong Kong, CLSA is a long way from its glory days. Citic bought the firm in 2012 from France’s Credit Agricole SA for $1.25 billion, and it remains the largest-ever mainland acquisition of an overseas broker. Before the takeover, CLSA’s equity research went toe-to-toe with top-ranked Deutsche Bank AG and Morgan Stanley, according to Greenwich Associates. By last year, it wasn’t even in the top five. That’s as China becomes an increasingly important market for its foreign institutional-investor base.
It didn’t take long for the ill-fated tie-up to show signs of strain. For years, Citic analysts in Beijing complained bitterly that they weren’t paid as much as their Hong Kong counterparts (despite the fact that their rivals lived in one of the world’s most expensive cities). Slone’s resignation follows CLSA’s decision to cut its 2018 bonus pool by 60 percent after booking $27 million in costs to integrate with Citic Securities’ Hong Kong unit, among other factors, according to Cathy Chan of Bloomberg News.
Slone, and other members of CLSA’s executive committee, didn’t receive a bonus for 2018 and were asked to take a pay cut for this year, according to people familiar with the matter. Bloomberg Intelligence analyst Sharnie Wong estimates that the chief executive was likely paid more than the entire board of its Chinese parent.
CLSA also struggled to insulate itself from industry-wide headwinds. Starting early last year, Europe’s MiFID II regulations required firms to “unbundle,” or charge clients separately for research and other services like trading and investment banking. Big houses, which had once benefited from offering one-stop services, are now aggressively cutting prices for their research to protect market share. Smaller outfits simply can’t compete.(1)
Despite these odds, CLSA has managed to gain a crucial edge in its China analysis – largely thanks to its parent’s mainland presence. Its on-the-ground survey, China Reality Research, is well-read; and the firm’s big-name global equity strategist Christopher Wood often cites Citic Securities’ publications in his weekly report. Such expertise is growing more important as the country's markets become a bigger component of major global equity and bond indexes.
But fidelity to its Beijing-based parent has come at a cost. CLSA’s research has taken a decidedly bullish bent: Just 12 of its 51 downgrades last year affected Chinese companies. Only three firms – China Unicom Hong Kong Ltd., China Telecom Corp. and Aluminum Corp. of China – were state-owned.
CLSA employees have long grumbled about the scale of support for Citic’s misguided ventures, such as its purchase of struggling energy conglomerate CEFC China Energy Co. The firm’s wholehearted adoption of the Belt and Road Initiative also surprised many market watchers. Late last year, CLSA bought a stake in a brokerage in Pakistan – an important outpost for President Xi Jinping’s project – after exiting the country two decades ago for being too unstable.
When Slone won an award last year, he praised the “seamless cooperation” between CLSA and its parent. Such platitudes – and star-studded investor forums graced by the likes Sarah Palin and George Clooney – hushed longtime naysayers, who questioned the viability of Citic’s acquisition from the start. Seven years later, looks like they were right on the money.
(1) As early as 2017, CLSA shutteredits U.S. equities research unitafter concluding that Wall Street competition was too formidable.
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Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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