When Jennifer Yu, Rothschild's top executive in China, wanted the firm to advise Chinese carmaker Zhejiang Geely on its bid for Volvo, some colleagues at the bank's headquarters in Europe were skeptical. A senior banker asked her how a "mouse" like Geely could swallow an "elephant" like Volvo. "There's a dragon behind this mouse, and it's China," Yu recalls answering. She and the team handling Geely won the argument, and Geely won the bidding. It completed the takeover of Volvo from Ford Motor (F) for more than $1.3 billion on Aug. 2.
Rothschild, the more-than-200-year-old family-controlled banking dynasty, is making a big move in China, and Yu is leading the charge. It plans to add 15 merger advisers there by March, giving it 55 in all, more than any foreign investment bank, says Olivier Pecoux, co-chief executive officer of Rothschild. Today, the merger business in China is still relatively small. So far this year, China has accounted for about 9 percent of the $1.1 trillion in deals around the globe, according to data compiled by Bloomberg. The potential, though, is enormous. China has $2.5 trillion in untapped foreign currency reserves and is mandating that state-owned companies expand abroad to secure natural resources such as oil and metals. "The economic balance of power has already changed, and it is moving to the East," says Yu, whose title is head of greater China. "There will be an increasing number of Western companies selling assets to China."
The firm hopes to build on the momentum of the Geely deal, which catapulted it to No. 8 among merger advisers in China so far this year, from 19th in 2009, according to data compiled by Bloomberg. That's nine places higher than Rothschild's ranking in North America, where it employs 150 bankers. Rothschild this year helped Royal Dutch Shell (RDSA) on its joint $3.1 billion bid for Brisbane (Australia)-based Arrow Energy with PetroChina (PTR), (RDSA) China's biggest offshore energy explorer. Rothschild is advising Beijing-based Citic Securities, the mainland's largest brokerage by market value, on creating a global equity brokerage with France's Crédit Agricole. "Clearly, under the leadership of Jennifer, and with the support of the senior management team, we are making meaningful progress in China," Chairman David de Rothschild writes in an e-mail.
A Shanghai native, Yu, 47, graduated from the Shanghai University of Finance & Economics. Her decision to study in China and work there after graduation gave her time to build connections, or guanxi, with government officials and corporate executives, many of whom were her classmates and friends, she says, declining to identify them.
Yu joined Rothschild in 2003 from BNP Paribas, where she focused on underwriting initial public offerings. She became head of China operations for Rothschild in 2005 and was promoted to her current role three years ago. In a country where the government often plays a key role in mergers and acquisitions—deciding, for example, which companies can bid for overseas assets—Yu's deep roots and extensive connections make her an effective dealmaker. "She knows what is doable or not in the Chinese environment," says Pecoux.
Yu's first major client at Rothschild, Shanghai Automotive Industry, bid for U.K.-based MG Rover, which was ultimately bought by Nanjing Automobile in 2005. Yu told her client not to worry—it would eventually own the Nanjing carmaker because the government would force consolidation in China's eastern region. Two years later, Shanghai Auto agreed to buy Nanjing's carmaking business in a government-brokered deal.
One challenge for Rothschild, Yu says, is that the firm doesn't have an equity underwriting business that could help clients raise money to fund acquisitions. The two leaders in Chinese M&A, according to Bloomberg data, state-backed China International Capital and Zurich-based UBS (UBS), both offer underwriting. Rothschild has been trying to overcome that disadvantage by advising clients on debt structuring and equity raising plans, says Mark Florance, Rothschild's head of Southeast Asia investment banking and a 22-year veteran of the firm.
The China merger market does not generate big fees right now. Chinese companies pay up to 0.7 percent on deals valued above $500 million, compared with 1.2 percent in Western Europe and 1.5 percent in the U.S., according to New York research firm Freeman & Co. Fees on M&A deals in mainland China through May totaled $181 million, compared with $3.1 billion for Western Europe and $4 billion for the U.S., the data show.
That doesn't mean the investments Rothschild is making today won't have a big payoff down the road. "People forget that in the 1980s, the U.S. banks came to Europe and got fewer fees than on Wall Street while building up the necessary infrastructure teams and systems," says Mark Bentley, a former HSBC (HBC) banker now with SDC Group in London. "Why should China be any different?" To Rothschild, it's not. And it's Yu's ambition to see Rothschild's reputation become as formidable in China as it is in Europe, where the firm made its name financing the Duke of Wellington's campaign against Napoleon. "In 10 years' time, Rothschild in China will become the Rothschild in Europe," she says.
The bottom line: Rothschild is building up its operations in China and sees the country becoming an increasingly lucrative source of dealmaking fees.