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Piper Jaffray to leave Hong Kong

  • Article by: DAVID PHELPS
  • Star Tribune
  • July 26, 2012 - 9:26 AM

Piper Jaffray's five-year experiment in Hong Kong is over.

The Minneapolis-based investment bank and brokerage announced Wednesday that it will close or sell its Hong Kong operation, which it purchased for $50 million, at the end of September for financial reasons.

Once promising, the Asian office became a serious drain on Piper's overall financial health, losing $16 million in the past 18 months.

"The decision to exit allows us to significantly reduce risk, immediately improve our financial performance and focus our full attention to our strategy to organically remix our portfolio to higher-margin, higher-return business," Chief Executive Andrew Duff said.

Duff said Piper would keep a small presence in Asia for U.S. companies doing business there and will provide U.S.-based research on China-based companies.

"Hong Kong is a growth market but it is also characterized by significant volatility accentuated by the global financial crisis over the past several years," Duff said in comments to stock analysts while reviewing Piper's second-quarter financial results.

Although the firm's net income and revenue were down for the quarter, Piper's stock traded up $1.07, closing at $20.63.

Piper made a big splash in the Asian market in 2007 when it acquired the Hong Kong-based investment bank Goldbond Capital Holdings for $50 million. The Minneapolis-based underwriter participated in the $1.3 billion IPO for Beijing-based Youku.com Inc., an Internet television company in 2010 and a $593.1 million secondary offering for the same company in 2011. The firm also participated in large technology offerings for other China companies including Baidu.com Inc.; E-Commerce China Dangdang Inc. and Giant Interactive Group Inc.

As recently as early 2011, Piper called Chinese investment opportunities "very compelling." But the dealmaking didn't come back, and earlier this year Piper said it had to reduce its workforce and cut other noncompensation expenses in China.

The second-quarter financial statement released Wednesday revealed for the first time the size of the Chinese losses: $9 million in 2011 and nearly $6.8 million in the first six months of 2012.

"They are bleeding red," said Morningstar analyst Michael Wong. "They overbuilt, and the market just turned on them. They made an incorrect risk-reward evaluation." Wong said he doubts that Piper will find a buyer for anything but a few strategic assets, if any exist, for the Hong Kong business.

Duff acknowledged that the upside of the Asian market was greatly outweighed by the downside when deals dried up. "We do not have the financial resources to build out the business into a broader, more sustainable platform or absorb the significant losses in this market," Duff told analysts.

Piper's overall net income for the quarter was $6.9 million, or 37 cents per share, compared with $10.7 million, or 55 cents per share, last year. Net revenue was $106.4 million, compared with $132.9 million last year.

Duff attributed the declines to weakness in its Asian markets.

"However, our main operations performed reasonably well in the second quarter given the more difficult operating conditions," he said. "Total investment banking revenues increased compared to the sequential first quarter led by strong public finance activity and improved M&A revenues."

The company took a $3.9 million after-tax loss related to its Hong Kong capital markets business, and a $2.2 million after-tax restructuring charge for severance and occupancy-related charges.

The company will continue to have an international presence with offices in London and Zurich.

David Phelps 612-673-7269 Staff writers Jim Buchta and Patrick Kennedy contributed to this report.

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