Beijing-based China Asset Management says it has received the final approval from the regulators to absorb Citic Fund Management into its business. Previously unheard of in the universe of fund management in China, the merger is set to conclude in the months ahead as the largest shareholder, Citic Securities, has exceeded the regulation cap on maximum ownership in fund-management houses.

ôItÆs driven by external regulations. ItÆs not a merger driven internally by either party,ö says John Li, chief international officer at ChinaAMC. ChinaAMC is currently 100%-owned by Citic Securities, which is also a 100% shareholder in Citic Funds. Furthermore, Citic Securities holds a majority in a third fund company, Citic-Prudential Fund Management, a joint venture with UK insurer Prudential.

Technically, the deal should have gone through a few years ago when the government decreed no one company could own more than a single controlling share and a second minority share in fund-management companies. But neither party was keen to force the issue and the officials at the China Securities Regulatory Commission had other priorities. But last year the government told Citic Securities to comply with the new laws.

Although fraught with complications, the merger will at least make ChinaAMC stand out as the biggest funds house in China.

According to Z-Ben Advisors, a Shanghai-based research house, ChinaAMC had the largest market share of the fund management market by AUM as of end of 2007. It managed close to Rmb248 billion ($35.2 billion) with a 7.58% market share. By acquiring Citic Funds, ChinaAMC will absorb the Rmb17.6 billion ($2.5 billion) AUM, and further consolidating its number one position by adding another 0.54% to its market share.

Citic Funds will cease to exist after the merger, while ChinaAMC will take on the four funds Citic now manages. This will extend ChinaAMC's lead over its close rivals Bosera Fund Management (with Rmb221.6 billion), Harvest Fund Management (Rmb207 billion) and Southern China Fund Management (Rmb193 billion).

ChinaAMC has already expanded to a new floor at its headquarters to house the Citic Funds staff. The new space will include a yoga and weight-training gym; ChinaAMC is trying to make the newcomers feel welcome.

However, like all M&A deals, there remain awkward issues related to post-merger indigestion û how to integrate products and management platforms, and retain talent. Key management staff from Citic obviously will not be able to retain their titles as managing directors and CIOs. As a result, a number of staff have already left.

ôItÆs very complicated,ö says Li.

ChinaAMC will also have to re-label CiticÆs products. ôTo change fund names, you need a fund shareholdersÆ meeting. How do you get over a million shareholders from all over the country to meet in a conference?ö he wonders.

ôThis might be one big test,ö says Li. He adds that ChinaAMCÆs management hopes to finalize the deal within this year, as it has been in talks for a few years already.

ChinaAMC and Citic Funds, as the first major example of M&A within the funds industry, will set precedents for any future examples. There is speculation, for example, what Fortis Investments will do this with its recently acquisition of ABN Amro Asset Management, which includes a stake in JV ABN Amro Teda. Fortis also has its own (more high-profile) China JV with Haitong Securities. Unlike the Citic Securities case, Fortis is not the controlling owner of either JV, but it may seek to dispose of one or try to combine the businesses. (Fortis and Fortis Haitong executives declined to comment.)

In the short run, there are no other M&A deals in the pipeline involving Chinese fund houses; the idea has never been considered. But ChinaAMC's absorption of Citic Funds will show such deals can be done, and paves the way for future dealmakers to think about new options.