NEW YORK (AP) – Investment bank Bear Stearns Cos. and Chinese bank Citic Securities Co. said Monday they will form a strategic partnership that includes $1 billion in cross-investments and the creation of a new Asian joint venture.
Citic, which is owned by the investment arm of the Chinese government, will invest in Bear Stearns through 40-year convertible trust preferred securities that will convert to about 6 percent of Bear Stearns' outstanding shares. Citic could potentially increase the stake to 9.9 percent.
Bear Stearns will acquire a similar stake in Citic through a six-year convertible debt security. Bear Stearns will also have options to acquire additional shares.
The announcement of the deal was fairly swift, as Vice Chairman Jiang Dingzhi of the China Banking Regulatory Commission said last Tuesday at a Communist Party meeting that Citic was interested in investing in Bear Stearns.
Aside from the cross-investment, the pair will form a new joint venture based in Hong Kong that will offer capital markets services across all of Asia. Bear Stearns will contribute its current Asian operations in Hong Kong, Tokyo and Singapore to the new joint venture. Citic will contribute its operations in Hong Kong and pay Bear Stearns a financial consideration for the new 50-50 joint venture.
The new venture will offer a range of products, including cross-border mergers and acquisitions advisory, international equity and fixed income offerings and venture capital, private equity and asset management services.
Each company is expected to have representation on the other's board of directors.
Bear Stearns is coming off a rocky summer in which two hedge funds it managed went bankrupt, losing billions of dollars on bad bets in the subprime mortgage industry.
Bear Stearns' earnings were among those hardest hit by rising delinquencies and defaults among subprime mortgages — loans given to customers with poor credit history — and the declining value of securities backed by the risky loans.
In recent months, as Bear Stearns tried to rebound from the credit crunch, there was heavy speculation the company would seek an outside investment, particularly one from Asia.
Bear Stearns has lagged behind its competitors in size and scope of operations, especially in Asian markets, making Citic a fit to diversify and grow its business.
Shares of Bear Stearns rose $1.09 in premarket trading to $117.50.