Will Peregrine Still Fly Free?

New stakeholder Zurich may curb the merchant bank's style

For nearly a decade, Peregrine Investments Holdings Ltd. has been one of Asia's boldest and most controversial investment banks. From his Hong Kong base, Chairman Philip Leigh Tose swaggered into such far-flung outposts as Burma, Bangladesh, and Vietnam in search of deals. He and Peregrine gambled that these countries would catapult rapidly from poverty to affluence the way Thailand and Indonesia had before them.

Then came the Asian currency crisis of 1997, sweeping across the region's economies and decimating the Hong Kong stock market. All of a sudden, rumors swirled that Peregrine, having suffered $1 billion in trading losses, was in danger of going under. Peregrine roundly denied the stories. But on Nov. 16, with its stock down 64% from its June high, it found a deep-pocketed savior. Zurich Group, the acquisitive Swiss financial giant, is buying 24.1% of Peregrine for $200 million. At 73% of book value, the deal was "very attractive," says Steven M. Gluckstern, CEO of Zurich Centre Investments, the private equity arm of the Zurich Group. Zurich will also contribute at least $50 million to a new Asian venture capital fund, which is expected to total $350 million to $500 million.

SHARES ZOOM. Peregrine is one of the biggest casualties of the currency crisis, but it won't be the last. Asia is littered with troubled financial institutions that could use foreign capital and knowhow. With an excess of banks and brokers, the region likely will undergo a brutal shakeout. For example, Citibank, Deutsche Bank, and Standard Chartered are rumored to be looking at Thailand's First Bangkok City Bank.

Zurich's $9.9 billion in shareholders' equity is a vote of confidence in Peregrine a local white knight wouldn't have provided. The day after the deal was announced, Peregrine's shares rocketed more than 10% in the first hour of Hong Kong trading. But the question remains whether Hong Kong's--and Peregrine's--glory days will ever return.

Another big question is whether the Swiss behemoth will smother Peregrine's swashbuckling style. Tose's ties with some of Hong Kong and China's most prominent businessmen allowed the firm to win a steady stream of profitable underwriting deals there. But Tose overestimated the firm's ability to profit from other ties across Asia. The former head of Peregrine's Vietnam operation, for example, has spent much of this year in jail on tax charges. And Peregrine is involved in a bitter dispute with a partner in a South Korean investment bank that wants to sell its stake without the Hong Kong company's approval.

Peregrine has already begun paring back most of its Asian operations. Further reductions are in store for Indonesia and Thailand, where it axed its retail operations in June. Peregrine will now focus on Hong Kong and China, where it has raised $2 billion in equity offerings so far this year. But the rough welcome given in October to China Telecom, the biggest China issue ever, will likely slow the flow of new deals. "There was a time when clients wanted a maverick broker in the region," says a former Peregrine executive. "But now is not that time."

Peregrine has become all too familiar with that sentiment. Until recently, Zurich and Peregrine had been negotiating the launch of a venture capital fund. But as the currency crisis worsened, the talks turned to an investment in Peregrine itself. Plagued by the rumors of losses, Peregrine watched helplessly as banks reduced credit lines and customers pulled back. As the pressure mounted, Peregrine's fixed-income desk, one of Asia's most active, reduced its staff and trading operations, fueling talk that the firm was in danger of failure.

SHORT YEAR. On Oct. 26, Peregrine took out a newspaper advertisement denying any substantial losses. For the period ending Oct. 24, the ad stated that Peregrine had reserved $60 million against bond losses and had seen profits at its stock- and bond-trading operations drop by more than half, to $35 million. Peregrine said its shareholders' equity had increased during the year and that it was buying back 10.3 million shares. Peregrine also will move its fiscal yearend from Dec. 31 to Nov. 30, to produce full-year audited results more quickly. ABN-Amro Hoare Govett analyst Anne Gardini estimates that Peregrine's earnings will rise from $82 million in 1997--a fiscal year with 11 months because of the reporting change--to $115 million in 1998.

For now, both firms vow that Peregrine won't change strategy with the Swiss on board. Tose and Group Managing Director Francis Leung, who started Peregrine, say they will still run the show. But the markets will be watching to see if Tose and Leung will ever fly as free again.

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