Quotes of the Day

The bidding war that erupted two weeks ago for PCCW, Hong Kong's largest telecommunications company, might strike some as bizarre. After all, fixed-line phone operators are plagued by low growth, ferocious competition and disruptive Internet technologies, making them hard to love—and PCCW is no exception. In the past six years, its stock price has crashed by 65%; last year, PCCW's consolidated revenue for its telecom operations crawled up by a paltry 1%. But if there's one positive thing to be said for such businesses, it's that they're dependable generators of cash. "Fixed-line companies are effectively like utilities," says John Heagerty, a Sydney-based financial-services analyst at ABN AMRO Securities. "They have steady and predictable cash flows."

And that's exactly why Macquarie Bank has reportedly offered more than $7 billion to buy PCCW's phone and media assets. The Australian investment bank has built a global empire in large part by packaging the least glamorous of acquisitions—such as toll roads and airports—into fixed-income funds, which are then sold to yield-hungry retail investors. Lately, the company's concept of an infrastructure play has broadened and its pursuit of acquisitions has grown increasingly audacious—earlier this year it mounted a $2.6 billion bid for the London Stock Exchange. That failed, but the bank's ability to turn tired old assets into lucrative investment vehicles has become so well known in financial circles that some have dubbed deals like the proposed PCCW acquisition "Macquisitions." Macquarie "has developed a lot of intellectual capital in this area," says Jack Chemello, an investment analyst with BT Funds Management. "They are way ahead of their competitors."

Ahead, but far from alone. Not content merely to supply traditional services such as stockbroking, underwriting and strategic advice to corporate clients, investment banks worldwide are increasingly taking on more risk by putting their own money into deals. In a recent letter to shareholders, Henry Paulson, Goldman Sachs' outgoing CEO and nominee for U.S. Treasury Secretary, noted how Goldman and others now look to use "their own balance sheets to extend credit to clients, to assume market risk on their behalf and sometimes to co-invest alongside them." In some respects, industry pioneers like Macquarie and Goldman are borrowing from the tactics of hedge funds and venture-capital firms to reinvent what investment banking is all about. Risk has its rewards. Macquarie's profits have increased roughly ninefold over the past 10 years, while its share price has soared 900% since the firm went public in 1996.

The bank's financial innovations were born partly out of necessity. Once an outpost of defunct British investment bank Hill Samuel Ltd., Australian executives carried out a management buyout in the mid-'80s and renamed the bank Macquarie in honor of a 19th century colonial governor. But it wasn't until 1996, when Australia's commodity exports began to result in large budget surpluses for the government, that Macquarie's chief executive, Allan Moss, who had joined the bank in the sleepy Hill Samuel days, saw his big chance. "Bond markets were drying up," recalls Gary Turner, a Sydney-based financial-services expert with Bain & Co. "At the same time pension funds, which were growing because of increasing compulsory contributions, had to invest somewhere."

Enter Macquarie. In 1996, aiming to attract some of that pension-fund money, the bank bought a toll road from the New South Wales government. The road was put into a trust, which under Australian law doesn't have to pay taxes. Then Moss went a step further: he placed the road into a listed fund, the Macquarie Infrastructure Group, which Macquarie manages for an annual fee of up to 1.25%, depending on its market value. If this fund outperforms its benchmark, Macquarie also pockets a juicy incentive fee of 15% of the profits. "It's a hedge-fund model being applied to infrastructure-asset management," says financial analyst Brian Johnson of JPMorgan Securities.

In recent years, Moss has taken that model global. In 2004 Macquarie bought the Asian securities operations of ING Barings, giving it more muscle to market its key infrastructure funds to retail and institutional investors. "The ING assets gave them a footprint in Asia which they didn't have before," says BT's Chemello. Macquarie subsequently went on a shopping spree. It invested in a South Korean toll-bridge project in Incheon for $64.6 million in 2005. Last December it bought a 40% stake in Taiwan Broadband, a cable operator in Taiwan, for roughly $200 million. A few months ago Macquarie also listed its first Asian infrastructure fund, the Macquarie Korea Infrastructure Fund, on the Korea Exchange and the London Stock Exchange. Macquarie's fund assets now total $101 billion.

Adding PCCW to this expanding portfolio may prove trickier. The news that Macquarie was negotiating with PCCW chairman Richard Li, son of Hong Kong tycoon Li Ka-shing, for his telecom business (which includes a mobile-phone operation and a promising Internet-TV venture) immediately drew a rival bid from private-equity firm Texas Pacific Group and its Asian affiliate, Newbridge Capital Group. Not only does Macquarie have a rival suitor, but the Chinese government may also fatally complicate the deal. That's because China Network Communications Group, one of China's state-owned telephone companies, has a 20% stake in PCCW and its officials are wary of the sale of an important Hong Kong asset to non-Chinese investors.

A Macquarie spokesman declined to comment on the bid, but the bank is eagerly exploring ways to get the deal done. Macquarie has reportedly offered to allow China Netcom to retain up to 50% of the restructured assets of PCCW. Meanwhile the bank is looking for partners. Star Group, an Asian broadcasting subsidiary of Rupert Murdoch's News Corp. media conglomerate, was considering joining Macquarie's bid—even though Murdoch himself expressed doubt that the deal would succeed. China is "treating Macquarie as hostile invaders," Murdoch told The Australian newspaper, which News Corp. owns. "It would be an amazing achievement if Macquarie managed to turn the situation around." Win or lose, though, the PCCW bid won't be the last Mac attack in Asia.

• Neel Chowdhury
• A bid for Hong Kong's PCCW is just the latest example of Macquarie Bank's gift for detecting rich opportunity in unglamorous assets