Excerpted from MONEY GAMES: The Inside Story of How American Dealmakers Saved Korea’s Most Iconic Bank (Wiley; October 13, 2020) by the CEO of Asia’s largest private equity, PAG, Weijian Shan, whom Fortune calls “China‘s private equity champion”
Q3 2020 hedge fund letters, conferences and more
Weijian Shan’s first book Out of the Gobi: My Story of China and America, was called “a deeply affecting memoir” by the Wall Street Journal and one of The Financial Times’ 2019 top ten Best Books of the Year. It details Shan’s raw will to succeed, and survive, against all odds as a former hard laborer as a member of the Inner Mongolia Construction Army Corp, to become one of the more respected and successful financiers in the “new China.” Now, Shan turns his storytelling skills to one of the most impactful and secretive buyout deals of the 1998 Asian financial crisis in Money Games.
Money Games is Shan’s insider account of one of the most successful and dramatic PE deals in history. The book is a riveting tale of high-stakes money-making for anyone who has ever wondered how private equity investors strike bargains, turn around businesses, and create immense value―or anyone interested in a captivating story of high-stakes money-making.
In a proud country still reeling from a humiliating International Monetary Fund bailout in the Asian Financial Crisis, Shan’s firm at the time, Newbridge Capital, had to muster every ounce of skill, determination, and patience to bring the deal to closing. Money Games details Shan’s insider account of this deal, what he learned about the power of private equity and the various twists and turns, successes and setback and the painstaking work it took to transform a troubled bank into a successful financial institution—and a massively profitable investment.
Korea First Bank - Newbridge Capital Deal
April 1999
The day before the press conference and FSC meeting, both the Wall Street Journal and the Financial Times published articles saying that the Korean government might pull out of the sale of Korea First Bank to Newbridge. Dow Jones, Bloomberg, and the Korea Economic Daily all called me for comment. Clearly, the government side was beginning a press offensive against us.
At 11 am the following day, in a room at Korea First Bank’s (KFB) headquarters that was packed with reporters, I began my press briefing. Choi of Korea First Bank, who spoke English fluently, translated for me. Choi was a good man, candid and strongly supportive of the deal. Noh had called the bank prior to the press conference in an attempt to dissuade him from acting as my translator, but Choi ignored Noh’s pressure and accompanied me. I thought it took a lot of courage for a bank employee to defy a senior official from the bank’s own regulator, and it signaled that Choi was strongly supportive of the transaction.
I began by apologizing for not being able to speak more than a few words in Korean and for having not met with the press sooner.
Then I said:
But I am studying the language, the history and the culture of Korea. We didn’t hold a press briefing earlier because we thought it was better to do more and talk less. However, we see much misperception of Newbridge in the press and we feel a responsibility to explain to you what we are and what we are not. We are not a hedge fund. We are not short-term investors. Short-term investors don’t invest in a down market. But we do. We are a private equity investment firm. We are turnaround specialists. We typically make a long-term investment to create value for stakeholders. We are good corporate citizens. We have the capital and experience to recapitalize and turn around Korea First Bank. We have a successful track record, which is why Morgan Stanley invited us to bid for the bank. The government signed the MOU with us because our proposal was the best the government had received.
Why Newbridge Wanted To Invest In Korea
I went on to explain why Newbridge wanted to invest in Korea: First, we have strong confidence in the Korean people, who are industrious and who have the potential to compete successfully in the world market. Second, we believe in Korea’s commitment to reform. Third, we know how to turn around failed banks better than anyone. We have a world-class team.
During the back-and-forth with reporters, I emphasized that we shared two common goals with the Korean government: running a clean bank and adopting international best practices. I highlighted the significant upside for the government in the deal and the fact that it would be a benchmark for banking reform in Korea. I described the credit culture that we were poised to build at Korea First Bank and how that would launch the bank to be a worthy international competitor.
“Would there be layoffs?” a reporter asked. I explained that we didn’t have plans to fire anyone and that we looked forward to working with KFB’s existing employees and management. By that point KFB’s chairman, Shee-yul Ryoo, had made significant cuts to payroll so we didn’t think further reductions would be necessary.
Everyone knew that our exclusivity under the MOU would expire in about a week, so reporters were eager to know how the negotiations were going.
I held my tongue and focused only on the positives. I described the deal as a perfect and respectful marriage with the Korean government. Of course, there were some disagreements, I said, but we respected the FSC negotiators. Besides, it would be a lose-lose outcome if the deal fell apart. “What is the cost of not doing this deal?” I asked rhetorically. I didn’t need to answer the question because the implication was clear: If the deal fell through, the government would be in violation of its agreement with the IMF and World Bank for the $58 billion rescue package. Taxpayers would be on the hook for all the money they had sunk into Korea First Bank. Plus, it would take more money to keep the bank afloat.
What would happen to the deal after the exclusivity period expired? That I refused to discuss. In truth, I had no clue.
Korea's Finance Ministry Supported The Deal
The next day, all the major newspapers, domestic and foreign, covered my statements. In general, the reaction was positive. It seemed the press briefing was a success. At least, it managed to crush all the lies about Newbridge being greedy and unreasonable. Even Korea’s finance ministry responded to my press briefing favorably, issuing a statement to say it supported the Newbridge-KFB deal. Only the FSC was unhappy with my press conference, as I heard, although it kept quiet.
Despite the economic pressures faced by Korea First Bank and the sustained top level attention to the deal, the FSC team’s negotiating strategy was very much the same when we sat across the table from them once again on the day of my press conference. Once again things stalled, and it became clear that we wouldn’t make any headway.
As the negotiations broke down, we felt intense pressure to figure out what was going on within the government. To do so we had engaged a New York–based advisory firm to help us. Its two principals, whom I will not name, were said to be well versed and well connected with Seoul’s political scene. They imbued an air of secrecy, intrigue, and paranoia in our minds, regaling us with tales of scheming as they described the political factions that were fighting for or against the reform agenda of President Dae-jung Kim.
They also told us that our phones and fax lines were bugged and that the government negotiators would know of any strategies or gambits we had discussed on internal conference calls. The hotel phones and our mobile phones were equally unsafe. After this, we were careful not to discuss confidential information over unsecured lines. Unfortunately, that left us without any secure means of communication, other than running out to find a public phone to make calls. I remember a few times Paul Chen had to run out in the rain to a phone booth across the street from the hotel to make a confidential call. All we could do was to minimize the risk of leaks by not saying much in our calls and memos until we were out of Korea.
Code Names
Our advisors told us that South Korea’s intelligence apparatus not only listened to our conversations but also had a codename for each of us. David Bonderman, apparently, was known by the codename “Kim Chee,” after Kimchi, the spicy pickled cabbage found in every Korean kitchen. In order to keep our secrets, our advisors gave each of us a codename to use. They even assigned codenames for us to use for each of them. One advisor’s codename was “Tall Guy” and the other was “Short Guy.” I was “Thin Guy.” Dan Carroll was “Handsome Guy.” Even with all these measures of secrecy, I did not exactly feel like James Bond. If these conspiracy theories were true, I thought, Korean intelligence agents were likely much more creative and professional than we were. Our codenames weren’t going to fool anyone. If you were to put us all in a lineup, my seven-year-old daughter would easily tell who was Tall Guy, Short Guy, Thin Guy, and Handsome Guy. If anything, it was probably easier to identify us by our codenames than by our real names.
Tall Guy and Short Guy brought a couple of people to see us. They claimed to know what was going on within the government and that they could connect us with those who could influence decision making in the National Assembly and the Blue House. But I never knew whether what the visitors told us was true. I did visit some Assembly representatives and Blue House officials, as arranged by Tall Guy and Short Guy, to brief them on the deal status and on our plans for Korea First Bank. I had no idea if those visits did any good. But I thought they were useful nonetheless because if we wanted to educate the public by briefing the press from time to time, we might as well do the same with politicians. At this point, the KFB deal was drawing so much public attention that it felt like Korea’s national pastime. We did not know who was for or against the deal, but it was prudent to win as many friends and as much support and sympathy for it as possible.
In the days running up to the expiration of exclusivity, Tall Guy and Short Guy repeatedly told us that ours was a done deal. They even had specific predictions for when the government would sign, but I had my doubts. There was no hint of willingness across the negotiation table, and there were no documents to sign. Each time, the closing date that Tall Guy and Short Guy identified came and went without a deal, and each time our advisors found some plausible explanation for the failure.
I spoke with Short Guy on May 2, 1999, hours before the midnight expiration of our exclusivity. He continued to insist it was a “done deal,” but he warned me: “The deal cannot be won at the table, but it can be lost at the table.” I did not really think about what he said at the time, but in retrospect I realized the import of what he meant. If we completed the deal, I would not be able to take any credit, because “the deal cannot be won at the table.” But if the deal did not happen, it would be all my fault, because the deal “can be lost at the table.” As I wrote in my notebook later, “so the strategy is to hold the line and wait for things to work out behind the scenes.”
The May 2 Deadline
The two days leading up to the May 2 deadline were unnerving and somewhat confusing. The FSC had flatly rejected our most recent proposal and, in fact, widened the gap by proposing to mark down the value of the bank’s deposits by 1.5 trillion won (about $1.2 billion).
We did not know what to make of these theatrics. The FSC had pushed their position so far from our proposals that it seemed impossible that we would find a compromise. It seemed, in fact, like the FSC team had no intention of trying to bridge our two positions. Meanwhile, other bidders began circling: Regent Pacific, a Hong Kong–based hedge fund, publicly announced on May 1 that it would send in an offer with much better terms than Newbridge’s after our exclusivity expired.
After strategizing among ourselves, we decided to let Mike O’Hanlon of Lehman lead the discussions on May 1. The hope was that the FSC team would be a bit more relaxed and wouldn’t feel as if each comment during the negotiation was a statement for the record.
The strategy achieved some measure of success; the FSC side did seem a bit less tense when they felt that they were dealing with a slightly neutral third party. But they remained as unyielding as ever and continued to demand that we accept their April 22 proposal, which we had already rejected. O’Hanlon informed them we could only negotiate on the basis of our most recent proposal, made on April 27. The gap between those terms and the ones that the FSC had proposed in earlier negotiations was relatively narrow and seemed easy to bridge. Left unsaid was how far the FSC had moved away from its own bargaining position in the intervening month. Before we wrapped up for the day, O’Hanlon left on the table a compromise offer, which we followed up on in writing later that day.
That afternoon, with some eight hours remaining before the deadline, the entire Newbridge and Lehman team went to the FSC’s office for final meeting. We had learned from a source there that Chairman Lee had attended every internal meeting held that day on this transaction. This was the first time we heard that the negotiation team on the other side might have received some signal from the top.
An Extension Of Exclusivity
Before we finished exchanging pleasantries, I was summoned to Noh’s office. O’Hanlon and I went together. O’Hanlon briefly explained our new proposal to Noh, and Noh replied that the government would need some time to review it and give us feedback. O’Hanlon then brought up the subject of an extension of exclusivity. Noh immediately asked if that was an official request.
“I could make it an official request,” I replied. Noh asked his staff to note down the request and asked me to send it to him in writing. Noh’s body language telegraphed that he had been trying to use the pending expiration of exclusivity as leverage against us, to force us to accept his proposal. He probably had expected us to capitulate right before the expiration. For that reason, I thought there was no way he would want to extend the exclusivity for us.
That was as far as we got with Noh on that day. I sent him a request for an extension of exclusivity for 10 days, to agree on major terms to be incorporated into a new MOU, followed by three weeks for the documentation and to close “as soon as practicable.”
Then we waited…
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