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On May 6, Singapore Telecommunications completed the S$684 million ($391 million) spin-off of its Singapore Post subsidiary, the city-state's dominant mail delivery service. Buying interest from major U.S., European and Asian institutions was so strong that the IPO was nine times oversubscribed, and underwriters UBS Capital Asia and DBS Group Holdings were able to price the IPO at S$0.60 a share, the top end of initial pricing projections. The successful transaction had a novel feature: Although it sold its shares mostly to overseas investors, notes Tan Jeh Wuan, who runs equity capital markets at DBS, "SingPost's management did not step outside of Singapore."
There was a simple reason for that unusual approach: severe acute respiratory syndrome. Unable to travel easily, SingPost executives stayed put and relied on videoconferencing and phone work to woo investors. In all, they and their investment bankers, who would otherwise have had to endure days of quarantine in a SARS-free country, arranged 80 hours of meetings conducted over two weeks with 125 investors in France, Hong Kong, Japan, the U.K. and the U.S.
"We contacted all the major investors that we set out to contact, and no investor on our list turned down the opportunity to do a video- or teleconference," says Tan. There were even some side benefits: SingPost and its bankers were able to cram more meetings into a shorter time span than usual, travel and hotel costs were zero, and none of the deal participants suffered jet lag.
Although many travel restrictions were eased in late May, SingPost's unconventional marketing campaign was the only way for most Asian companies and their bankers to sell deals for a time. The SARS virus, which has killed more than 750 people worldwide, infected more than 8,200 and panicked just about everyone else, has drastically curtailed travel and with it much business activity, grounding normally peripatetic investment bankers. Aside from the SingPost offering, only two Asian equity transactions have closed since SARS began to spread widely in late March. Kumgang Korea Chemical Co., the country's leading paints and building products company, and its banker, J.P. Morgan Securities (Asia Pacific), closed a $30 million equity deal using a virtual road show that reached 20 big investors in the U.S. and 35 in Hong Kong and Singapore. And Taiwan's China Steel Corp. raised $113 million via global depositary receipts through Citigroup Global Capital Markets Asia and Goldman Sachs (Asia).
All this spells doom and gloom for a region that only lately had been one of the few economic bright spots on the globe. Even if life were to return to normal soon -- and that's a big if -- Jon Fouts, head of Morgan Stanley's capital markets business in Asia, estimates that overall fundraising in Asia will likely be off by 10 to 20 percent this year as a result of SARS. And the true costs may not appear until "several months down the line," says another banker. "The lack of client contact, the lack of travel, may have an effect on the pipeline further along."
In the meantime, most deal makers and their corporate clients -- particularly those in the hardest hit areas of mainland China, Hong Kong, Singapore and Taiwan -- have had to content themselves with just staying in touch with clients. Morgan Stanley completed 20 virtual road shows for investors in the midst of the outbreak, eight of them requested by companies that "liked the idea of doing virtual road shows rather than getting on the road," says Alexandria Albers, Morgan Stanley's chief administration officer for Asia.
Quarantines, fear of infection and limited travel have changed everyone's working life. Even after the World Health Organization lifted its travel advisory against Hong Kong and Guangdong province on May 23, James Squire, Hong Kongbased head of Asian equities at Baring Asset Management, was still getting invited to an average of one new video presentation every other day. "There's nothing quite as good as looking somebody in the eye, face-to-face, or shaking a hand. But communication hasn't proved enormously difficult during SARS," says Squire. "It's not bad, considering, and it's kept people up to speed in the majority of companies."
Keeping up-to-speed was about all one could hope for. Deal-making firms that heavily rely on customer contact found themselves coping with unexpected challenges to their business contingency plans. "Disease as a crisis was a totally new issue," says Robert Pride, Deutsche Bank's chief operating officer for Asia. Post-9/11 crisis planning focused on operating with physical infrastructure damaged by, say, terrorist attacks or on working amid power outages. SARS is more akin to a bioterrorist attack; it was the people who meet with clients and run the infrastructure that were victimized. Most firms' defense preparations were similar to Deutsche Bank's.
On April 1, bank executives, worried that local officials could quarantine their Cheung Kong Tower headquarters, put their Asia continuity plan into effect for the first time. With military precision, the bank's corporate real estate services, information technology and business continuity units coordinated the relocation of 66 staff members from Deutsche Bank's global markets, equities, corporate finance, compliance, infrastructure and global technology operations teams to Pacific Place, a nearby office complex. A group of 13 Deutsche Bank staffers worked through the night alongside employees of a moving company loading and unloading computers, printers and other equipment to make sure that the bank could open for business at the second site at 7:00 a.m. the next day. "We were not taking any chances," says Pride. "That's why we actioned the whole move overnight."
That was just the start. Each business unit at Deutsche Bank then subdivided: 32 people were instructed to work at home, and 120 more were shuttled off to SARS-free locations in Bangkok, Seoul, Sydney and Tokyo, so that they could continue to travel freely around a region that was increasingly wary of visitors from Hong Kong or Singapore.
Despite such precautions, business travel became a severe headache for most firms. Although many quarantines have since been lifted, Cheah Cheng Hye, co-founder of Hong Kongbased asset management firm Value Partners, noted in mid-May that his ten office-bound fund managers and analysts were mostly working the phones. Pre-SARS at least half would have been in China meeting company executives. "I had a meeting set for next week," sighs Cheah, "but the guy suddenly canceled on me." Scores of Asian conferences that often serve as key gathering points for businessmen and political leaders have been scrapped. The most prominent: the Asian Development Bank's annual meeting, scheduled for late May in Istanbul.
Like Deutsche Bank, most banks posted rainmakers to SARS-free countries -- thus freeing them from the quarantines that many countries were imposing on visitors from Hong Kong or Singapore. (Taiwan, where the disease is still spreading, places a 14-day quarantine on anyone coming in from another afflicted country.) Bangkok, Manila, Seoul, Sydney, Tokyo and even New York were the most frequently used alternative bases. Some of the postings were ingenious. Deutsche Bank's DB Real Estate, for instance, relocated four staff members and their families to one of the firm's investments in Thailand, a resort hotel on the island of Phuket. In an e-mail exchange Morgan Laughlin, head of DB Real Estate in Asia ex-Japan, explains, "Staff and family could reside there at much-reduced cost to other alternatives. This option also provided frequent and short direct travel access to main centers around the region."
In some cases, investment banking firms set their own quarantine programs to assuage customers. Many banks said employees traveling from SARS-afflicted countries must first spend time in self-imposed quarantine in a SARS-free country. "We didn't want bankers calling clients and saying, 'Come on, I've got a different idea, it's urgent, we need to talk about it,'" says Fouts of Morgan Stanley, which established ten-day quarantines for its bankers. "That's a pretty awkward position to put a client in."
Even that was not enough for some customers. J.P. Morgan Securities (Asia Pacific) COO Richard Mounce says one company declined to meet one of the firm's Hong Kongbased bankers even after he had served a ten-day quarantine. "You are still from Hong Kong," apologized an Asian executive in canceling the meeting. "Each individual has his own level of concern, and we need to respect that," adds Mounce.
What amazed some bankers and consultants was that even countries without a single SARS case, like South Korea, felt the effects. "Americans tend to view Asia as one place. Seldom is Korea the only stop," says Tami Overby, executive vice president of the American Chamber of Commerce in South Korea. General Motors Corp. affiliate GM Daewoo Auto & Technology was set to show off new car models in April to American journalists. The scribes canceled the trip. And the Trilateral Commission, an influential Washington, D.C.based international policy group, had a poorly attended annual meeting in Seoul in mid-April. Several of its distinguished members, including former U.S. secretary of State Henry Kissinger and retired Defense secretary William Perry, opted out.
Hank Morris, a director of Seoul-based Industrial Research and Consulting, concedes that such behavior is a "little bizarre" but says that it is understandable under the circumstances. "When people think this thing spreads through airplane flights, a lot of people are afraid to travel anywhere in Asia," he says.
This fear -- rational or otherwise -- among international travelers was even more evident among workers in afflicted countries, particularly in late March and early April. Its intensity caught most contingency planners by surprise. "Our crisis and rapid-response planning have not had to deal with the emotional employee element," says Morgan Stanley's Albers. "When we put together crisis-strategic-planning scenarios, we had not done so with a disease in mind."
Reining in panic was the biggest challenge at most firms. Workers inundated human resources departments and senior executives with frenzied e-mails and phone calls. "There were rumors everywhere. How you could get it, how it is passed, where it was hitting," says Mounce. "You've just got to crush that as quickly as you can by getting the facts out there and communicating regularly with your employees."
Deutsche Bank regional CEO Ken Borda invited staff to e-mail or phone him personally with concerns. Morgan Stanley set up a 24-hour hotline for staff. "The most effective thing that we did was engage two well-respected local doctors to come in and give an overview to our staff, to tell them how they can look after themselves and to answer questions," says Albers. Morgan Stanley then Webcast the presentation firmwide. "The tension deflated very quickly when people had an opportunity to listen to an informed, credible source and have questions answered," she notes.
Banks provided their workers with direct -- and visible -- support. They imported hundreds of thousands of surgical masks, provided antibacterial wipes and antiseptic soaps and in one case even offered thermometers to employees who wanted them. Standard Chartered Bank's Hong Kong customers walked across bleach-soaked welcome mats to enter branches. J.P. Morgan's equities trading floor was cleaned every 45 minutes, and bathrooms were scrubbed once an hour. The firm went so far as to import the now-familiar Barrierman protective space suits used by doctors and nurses treating SARS patients so that workers could keep the firm's data center functioning. "Whether or not there's a SARS infection or a risk of it, people have to be able to go in to service, repair and maintain our data centers," says regional COO Mounce. "We can't close down the data center."
Although the SARS outbreak is not yet contained, bankers are trying to draw lessons from it. Deutsche Bank's Pride intends to hold a half-day workshop for top executives to discuss possible revisions to the firm's business contingency plans. One topic: whether Deutsche needs backup facilities in every Asian country, or whether it should devote its resources to bigger sites in Hong Kong, Singapore and Sydney. For a financial firm these can be vexing issues because moving a revenue-generating currency or equities team cross-border -- even temporarily -- presents tax, regulatory and licensing issues.
Morgan Stanley's Albers has no plans to switch backup sites. Still, she's pondering how to make use of one SARS-related insight: "Never underestimate the ability of highly intelligent people to succumb to fear -- and panic."
Additional reporting was provided by contributors Charles Smith in Tokyo, Richard Meyer in Shanghai, Donald Kirk in Seoul and Robert Horn in Bangkok.
Gauging another Chinese ailment: secrecy
First China bungled its coverup of the spread of severe acute respiratory syndrome in Beijing. Then local officials cracked down on the deadly pneumonia virus with such ferocity that their quarantines, roadblocks, business closures and, finally, threats to execute anyone knowingly spreading the disease brought parts of the country to a standstill.
So why is top China fund manager Cheah Cheng Hye so sure that the government's handling of SARS will ultimately improve the country's long-term prospects? Call it shock therapy. Once Communist Party leaders grasped how much was at stake -- tens of billions of dollars in foreign investment, their political and economic reputation in Asia and the world, not to mention thousands of lives throughout the region -- it did act with conviction, says Cheah. Well-connected bureaucrats and politicians like Health Minister Zhang Wenkang and Beijing mayor Meng Xuenong were sacked, a further 120 officials from 15 cities or regions were fired or disciplined for dereliction of duty, and World Health Organization officials were given better access to the sick and allowed to gather more information.
"The government is recognizing that China is now irreversibly part of the global system of trade and information and that it has to show it is much more responsive," says Cheah, co-owner of Hong Kongbased asset management firm Value Partners. "It's so promising to us."
Cheah concedes that the secrecy of the Communist Party leadership, drawn from the Mandarin elite that has ruled China for thousands of years, has been a huge obstacle in preventing the spread of the disease; transparent public policies and quick communication have been much more effective. But he takes the firings, reprimands and more-open dissemination of information as progress: "They are responding faster than they otherwise would," he says.
Perhaps, but many China analysts and businesspeople are skeptical that this new attitude will outlast the disease itself. "To ask the world to believe that China is honest after one incident is a bit much," says Robert Broadfoot, head of Hong Kongbased Political and Economic Risk Consultancy. Early on there were some brazen instances of deceit. Beijing officials at one point yanked 31 confirmed SARS patients from the China Japan Friendship Hospital and drove them around the city in ambulances for several hours to hide them from WHO officials visiting the hospital.
Such acts make Broadfoot, among others, leery of all government information. "There are statistics that we all know are dubious and that are harder to monitor than SARS, like nonperforming loans. Are bank NPLs going to be revised? If China's really changed its ways, why haven't these numbers been changed?"
Citigroup economist Huang Yiping echoed those concerns in a note to clients: "If the SARS numbers were manipulated in such a way, how much confidence should investors put in data on GDP, inflation, investment, retail sales and industrial production?"
How much the Chinese government's reputation has been hurt among foreign investors will likely be determined over the next two or three months. If it brings the spread of SARS under control without further embarrassing incidents, its standing will be enhanced. By mid-May there were tentative signs that it was making headway: New infections fell below 30 per day, the lowest level since early April, and information about the disease was being published in newspapers.
But should SARS flare up again -- or new cover-ups be exposed -- the consequences could be serious and lasting. Foreign direct investors who pumped a record $50 billion-plus into the economy last year may rethink some of their basic assumptions about China. The torrid pace of foreign direct investment did not abate in the first four months of 2003; it increased 51.1 percent, to $17.8 billion, according to the Ministry of Commerce. Most analysts, however, expect second-quarter numbers to show a steep drop. Thus far disruption to foreign plants has been minimal. "There has been no major effect," says Barry Houlston, head of Singer Sewing Machine Co. in Shanghai, which has reported few SARS cases. "No bottlenecks."
Still, many manufacturers are taking precautions. Toshiko Tanaka, a senior finance executive at Japan's Canon, says the company has begun developing alternative supply sources for components for digital cameras, printers and photocopying machines, in case it has to shift production back to Japan from its Guangzhou plant. Canon's earnings could be "severely damaged" if it has to suspend Chinese operations, Tanaka told reporters in April.
The government's initial miscues alone fortify the case for a diversified Asian production base -- sometimes referred to as the "China plus one" strategy. Vincent Chen, China economist and strategist with UBS Capital in Hong Kong, asks: "Can local governments handle the balance between controlling an epidemic on one hand and not disturbing the economic system on the other? You clearly see that there are some administrative efficiency issues."
With China now the world's low-cost producer for many consumer goods, Cheah believes such worries are misplaced. "If you try to make shoes in Southeast Asia or Latin America, you find your competitor who is making them in China has a price-quality point superior to yours," he says. "You've got to join them." That, at least, is the hope in Beijing. -- K.H.