Hongkong & Shanghai Enters Europe by Buying 14.9% of Midland

The Hongkong & Shanghai Banking Corp., which owns U. S.-based Marine Midland Banks Inc., said Friday that it will buy 14.9% of Britain’s Midland Bank in a deal that may be the prelude to a merger.

Sir Kit McMahon, Midland’s chairman, said the deal worth $674 million gave Midland, the fourth-largest British commercial bank, “breathing space.”

“There has been an unclear and ambiguous situation which was unsettling for all of us,” he told a news conference, referring to recent speculation that Midland might be vulnerable to a takeover. It had to set aside more than $1.75 billion against doubtful Third World loans this year.

Both banks hailed the deal--under which Hongkong & Shanghai will buy 81 million new Midland shares by year-end, giving the British bank a strong cash injection--as strengthening both their operations.

It ends a long quest by Hongkong Bank, one of two issuers of the British colony’s currency, to expand its business in Europe. Hongkong Bank signed a final agreement in September to buy Buffalo, N.Y.-based Marine Midland, the 22nd-largest bank in the United States.

“We have been seeking to expand in Europe for a considerable number of years,” said Hongkong Bank Chairman William Purves, who will join Midland’s board. Hongkong Bank tried to buy the Royal Bank of Scotland in 1981 but was forced to abandon the effort.

McMahon said the deal, which will take effect Dec. 22, prevented Hongkong Bank from raising its stake for three years unless another party acquired more than 15% of Midland. “Hongkong Bank could then increase its holding to fight back,” McMahon said.

He said the idea for the deal came up at a breakfast meeting of the International Monetary Fund in Washington in September.

“We did not consider a full merger because this would have tested regulatory parameters and the political will. We have decided to leave it open for the future,” he said.

McMahon said he doubted that the Bank of England, in the current unstable market climate, would let anyone take over Midland.

Analyst John Tyce at brokers Alexanders Laing & Cruickshank said he believed that Hongkong Bank would own more than 15% of Midland when the three-year standstill expired.

Nigel Cobby, with brokers Morgan Stanley, said Midland stood to gain more than Hongkong Bank in the short term but added that the Asian bank “bought 15% at a substantial premium to the market price. . . . They are long-term players.”

Midland also said Friday that it was adding $176 million to its existing provisions against bad debt, a measure likely to have been postponed if it had not been for the deal with Hongkong Bank.

Market sources said this was likely to influence other institutions to raise their loan loss provisions. During the summer, Midland, along with several big U.S. and British banks, took charges against profits to cover doubtful loans.

But Midland, after making its provisions, had to strengthen its finances by selling off Scottish, Irish and Northern Irish banking interests, and by going to the market with a rights issue of stock worth $1.15 billion.

Later, market rumors suggested that Midland might be vulnerable to a takeover and it was courted by advertising giant Saatchi & Saatchi.

McMahon said teaming up with Hongkong & Shanghai and the cash injection meant that Midland would be better placed to “meet the pressures and opportunities of a rapidly changing financial environment.”

He said the move did not indicate that Midland was in a weak financial position. “As a result of this we will be one of the best capitalized banks in the world.”