Guotai Junan Securities announced that it plans to purchase a total of 99.26% shares of Minsheng Securities held by Guolian Group, Fengquan Valley, and 45 other transaction counterparts through the issuance of A-share shares. It is reported that the price for issuing shares to raise supporting funds this time is 11.17 yuan per share, with a total of 2.64 billion shares to be issued, accounting for 48.25% of the total share capital of the listed company after issuance (excluding supporting financing), and the total transaction consideration reaches 29.492 billion yuan. The assets of the two securities firms will exceed 160 billion yuan after the merger.

It is worth mentioning that if this transaction is successfully completed, it is expected to become the first successful market-oriented merger and acquisition case of securities firms and a demonstration case of the Yangtze River Delta integration.

Industry mergers and acquisitions are in full swing. In fact, the reorganization of "Guotai Junan + Minsheng" is not an isolated case in the industry. This year, the tide of mergers and acquisitions in the securities industry is in full swing. Several securities firm merger plans, such as "Zheshang + Guodu", "Western + Guorong", "Ping An + Fangzheng", and "Pacific + Hua Chuang", are also rapidly advancing, and many securities firm merger dramas are intensifying!

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On the evening of July 16, Zheshang Securities announced that the application for the qualification of Guodu Securities shareholders was accepted by the China Securities Regulatory Commission (CSRC).

Also on July 16, Hua Chuang Yunxin responded on the investor platform, stating that in September 2023, the CSRC officially accepted the application for Hua Chuang Securities to change to Pacific Securities as the main shareholder or actual controller. Currently, Hua Chuang Securities is actively and orderly promoting the relevant work, and the shareholder qualification is still under review by the CSRC.

On June 21, Western Securities announced that, based on its own development needs, it is planning to acquire the controlling rights of Guorong Securities by paying cash, and the specific proportion of shares to be acquired will be subject to the final signed share transfer agreement.

Why are securities firm mergers and acquisitions so popular now?After synthesizing and organizing information from various sources, the reasons may include:

Firstly, on the policy front, there has been a continuous flow of favorable winds.

Since the second half of 2023, regulatory authorities have repeatedly encouraged leading securities firms to grow stronger through mergers and acquisitions, with a continuous stream of supportive policies for mergers and reorganizations.

On April 25th, the State Council issued the "Report on the Special Report on the Management of State-owned Assets in Financial Enterprises, Research and Handling of Review Opinions, and Rectification and Accountability," proposing to "focus efforts on creating a 'national team' in the financial industry and promote leading securities companies to become stronger and better."

The new "Nine National Articles" released in April this year also clearly emphasized increasing the intensity of merger and reorganization reforms and taking multiple measures to invigorate the merger and reorganization market.

On March 15th, the China Securities Regulatory Commission (CSRC) issued the "Opinions on Strengthening the Regulation of Securities Companies and Public Fund Management and Accelerating the Construction of First-class Investment Banks and Investment Institutions (Trial)," proposing to moderately expand the capital space for high-quality institutions and support leading institutions to become better and stronger through mergers and reorganizations, organizational innovation, and other methods.

Secondly, on the supply side, the Matthew effect intensifies pressure, and small and medium-sized institutions may actively seek to be acquired.

According to a research report by Dongwu Securities, under the condition that the industry concentration has always been at a high level, the profitability of leading securities firms significantly exceeds that of small and medium-sized securities firms. Since 2016, the median return on equity (ROE) of the top 15 securities firms in the industry by net assets has basically been 3%-4% ahead of the bottom 15.

Dongwu Securities believes that under this background, the willingness of shareholders of small and medium-sized securities firms to transfer equity has increased, and equity transfer events have occurred frequently. For some small and medium-sized securities firms lacking distinctive business features, actively seeking to be merged and reorganized is an effective way to break through.Moving on to the demand side, the steady advancement of the opening up of the capital market has accelerated the layout of foreign securities firms in the Chinese market. Leading domestic securities firms are facing overseas challenges, and the domestic securities industry landscape may be reconstructed.

In October 2019, the China Securities Regulatory Commission (CSRC) clarified that starting from December 1, 2020, the foreign shareholding ratio limit for securities companies would be abolished, presenting a new situation for the reconstruction of the domestic securities industry.

In October 2023, the Central Financial Work Conference proposed to focus on promoting high-level financial openness and ensuring national financial and economic security. It emphasized the importance of balancing "bringing in" and "going out," and steadily expanding institutional openness in the financial sector.

Dongwu Securities pointed out that the current situation is that compared with the top investment banks overseas, the scale of domestic securities firms is still difficult to compete with the top overseas investment banks.

Looking at the comparison of the size of the top securities firms in China and the United States, as of the end of 2023, the net assets of CITIC/Goldman Sachs/Morgan Stanley were $38/116.9/99 billion, respectively. Their revenues in 2023 were $8.5/45.2/53.6 billion, and their net profits attributable to the parent company were $2.8/7.9/8.5 billion, respectively.

Dongwu Securities stated that the scale of the top securities firms in China and the United States is not yet at the same level. Expanding scale through mergers and acquisitions is a feasible way for leading domestic securities firms to enhance their international competitiveness.

Typical cases of mergers and acquisitions

Looking back at history, mergers and acquisitions are indeed an effective way for securities firms to grow rapidly and become strong. According to Dongwu Securities, there are typical cases in history where securities firms have rapidly increased their scale and competitiveness through mergers and acquisitions:

1) CICC's acquisition of China Investment Securities to make up for the shortcomings in brokerage business.

After 2010, the channel role of domestic investment banks gradually diminished, and the personnel turmoil brought about by changes in company equity also shook the competitive position of CICC. In order to enhance the company's comprehensive competitiveness and strengthen its leading position in the securities industry, CICC announced the acquisition of China Investment Securities.After the acquisition, CICC's total assets ranking rose from 17th in 2016 to 9th in 2017, with its scale growing to the first tier of the industry.

In terms of brokerage business, CICC supplemented its shortcomings in traditional brokerage services through this acquisition, with net brokerage revenue increasing by 82.75% year-on-year in 2017. In September 2019, CITIC Securities was renamed CICC Wealth, and its innovative wealth management model represented by buy-side investment consulting has now become an industry benchmark.

2) CITIC Securities rapidly expanded its coverage map through external mergers and acquisitions.

CITIC Securities gradually improved its business lines and opened up national and overseas markets through a series of acquisitions, rapidly enhancing its profitability and developing from a medium-sized brokerage to an industry leader.

Specifically, through the acquisition of Wantong Securities and Jintong Securities, CITIC Securities' brokerage business market share has greatly increased. After acquiring Wantong Securities in 2004 to open up the Shandong market and Jintong Securities in 2006 to open up the Zhejiang market, CITIC Securities' stock and fund transaction market share increased by 67% to 4.8%.

What's different about the new round of mergers and acquisitions in the securities industry compared to the past?

According to a research report by Guotai Junan, looking back at the history of the entire securities industry, there are three main stages of mergers and acquisitions in the securities industry:

1995-2003, according to regulatory requirements for separate operations, some securities firms acquired a series of business departments.

2004-2011, according to the regulatory requirements for comprehensive management of industry risks and "one participation and one control" to resolve competition among peers, some high-risk securities firms were entrusted and acquired, and some securities firm equity was transferred to meet the "one participation and one control" requirements.

2012-2022, the policy of "one participation and one control" and the need for high-quality securities firms to innovate and develop have driven mergers and acquisitions during this period.During this period, significant equity changes and restructuring integration cases in the major securities firms from 2012 to 2022 were relatively concentrated. Typical cases include the mergers and acquisitions of securities firms under the control of Central Huijin Investment Ltd., the merger of Shenyin & Wanguo Securities and Hongyuan Securities, the aforementioned acquisition of China Securities by CICC, and the merger and acquisition cases driven by high-quality securities firms, such as CITIC Securities' acquisition of CLSA and CITIC Securities' acquisition of Guangzhou Securities.

What is different about this wave of mergers and acquisitions in the securities industry compared to the past?

According to an analysis by Securities Times, in the early years, mergers and acquisitions in the securities industry were either for relief purposes, to resolve the "one participation, one control" listing qualification issue, or for cross-border mergers and acquisitions to quickly gain market share in unfamiliar overseas markets, or for internet platforms to obtain practice licenses.

However, now, the mergers and acquisitions between full-license securities firms are increasing, and they are becoming more market-oriented. Since the mergers and acquisitions in the securities industry are no longer solely for obtaining licenses, they may be aimed at obtaining customer resources, mature teams, etc., in order to expand market share, enhance profitability, and grow stronger. It is expected that there will be more market-oriented mergers and acquisitions in the securities industry in the future.