One of the simplest investment and business rules has to be to avoid purchasing businesses where one does not have a core competencies.  China Mobile’s recent successes seem to have given it the confidence to ignore that rule.  During the trading session, China Mobile’s share’s plummeted after it announced its intention to buy out Pudong Bank.  The reason behind the merger was to offer electronic payment services through mobile phones.  This would allow China Mobile to leverage the banking franchise for its benefit and tap into the online market in China, which has been estimated at $200 billion yuan.  Still, the risks of such a purchase may outweigh the benefits.

Mark Lee of Bloomberg reported that “China Mobile Ltd. fell in Hong Kong trading on concern the world’s biggest phone company by value is deviating from its main business by considering an investment in Shanghai Pudong Development Bank Co.

China Mobile fell 2.4 percent to HK$72.85, its lowest close since Jan. 4. The carrier has lost HK$89.3 billion ($11.5 billion), or 5.8 percent, of market value in three straight daily declines through today and has underperformed the benchmark Hang Seng Index since Feb. 26, when Guotai Junan Securities Co. said the carrier may buy a stake in Pudong Bank.

China Mobile Chairman Wang Jianzhou said yesterday the possible investment in Pudong Bank, which Guotai Junan estimates may cost $5.9 billion, would help the carrier build its electronic commerce business and lift earnings. The transaction would help replenish capital at the Shanghai-based lender after Chinese banks extended a record 9.59 trillion yuan ($1.4 trillion) of credit last year.

“You don’t need to buy a bank to get into mobile banking. They should just stick to what they do,” said Christopher Wong, a fund manager at Aberdeen Asset Management, which manages $45 billion of assets, including China Mobile shares, in Asia excluding Japan. “We’ll be disappointed if this goes through. This is not what they do.”

Pudong Bank, part-owned by Citigroup Inc., said yesterday in a Shanghai stock exchange filing that talks on a possible investment by China Mobile are under way. Wang said a deal may be concluded soon and would lift China Mobile’s earnings per share as support from a bank helps it expand in e-commerce, a market dominated domestically by Alibaba Group Holding Ltd.

Trading Halted

China Mobile, which had 256 billion yuan of cash at the end of June according to its first-half earnings report, may buy 2.2 billion Pudong Bank shares for 17.82 yuan apiece, Guotai Junan analyst Wu Yonggang wrote in a note last week, without citing anyone. That’s 14 percent lower than the stock’s closing price before trading was halted on Feb. 26 pending an announcement about a strategic investment.

“It doesn’t make sense for the management to be using funds this way,” said Bertram Lai, who rates China Mobile shares “neutral” at CIMB-GK Securities in Hong Kong. “They should be returning it to shareholders.”

China Mobile said the deal would increase earnings per share and help the company develop its mobile-payment operations.

“The company is fully confident that this share subscription will deliver synergies, and bring benefits in the short, medium and long term to investors,” it said in an e-mail today.

Underperforming Shares

The phone carrier, with a market capitalization of HK$1.5 trillion ($193.2 billion) as of yesterday, hired China International Capital Corp. as its financial adviser, two people involved in the talks said, asking not to be identified because of confidentiality agreements.

“Such investment raises some concerns,” Morgan Stanley analysts including Yvonne Chow wrote in a report today. “Given its dominant market share in mobile, we believe a partnership with a relatively larger bank would help China Mobile gain a much better platform for developing further applications.”

China Mobile hadn’t held talks with other lenders before the current discussions with Pudong Bank, chairman Wang told reporters in Hong Kong yesterday during a teleconference from Beijing. He said Pudong Bank’s share price was “reasonable.”

Alipay, owned by Hangzhou, east China-based Alibaba Group, controls almost 60 percent of China’s online-payment market, according to its Web site. Chinese consumers bought more than 180 billion yuan of goods and services on the Internet last year, according to Fang Meiqin, research director at BDA China Ltd, a Beijing-based telecommunications industry consultant.

Calling the Shots

The value of e-commerce transactions settled using mobile handsets will probably increase to more than 7 billion yuan by 2013, according to BDA.

“It will become much more convenient for China Mobile to offer electronic payment services if they have an alliance with a bank,” said Fang. “In China, technology companies don’t have the necessary licenses to offer financial services.”

A deal with Pudong Bank wouldn’t undermine China Mobile’s ability to partner with other lenders, Wang said.

“I don’t know what strategically that would provide China Mobile,” CIMB’s Lai said. “As the leading player in the market, it can theoretically call the shots and partner with anybody.”

China Mobile wouldn’t be alone in investing in financial firms. South Korea’s SK Telecom Co. last year agreed to buy a stake in Hana Financial Group Inc.’s credit-card unit for 400 billion won ($349 million), while Globe Telecom Inc. in the Philippines agreed to buy 40 percent of BPI-Globe BanKO Savings Bank in 2008. Nokia Oyj, the world’s biggest maker of mobile phones, last year bought a minority stake in Obopay, a supplier of mobile banking services in the U.S. and India.

Stimulus Package

Few mobile banking ventures in emerging markets have been successful, Morgan Stanley wrote.

China Mobile started allowing some users to pay bills with their handsets last year, and began providing other services such as mobile television and electronic readers, Chairman Wang said in November. The company is expanding its range of value- added services as competition intensifies with rivals China Telecom Corp. and China Unicom (Hong Kong) Ltd.

Pudong Bank, with 491 outlets nationwide, wants to boost financial strength after expanding loans by 30 percent in the first nine months of last year to support China’s 4 trillion- yuan economic stimulus package. The Shanghai-based lender in September it raised 15 billion yuan in a private placement to ensure it has enough capital to meet loan demand and regulatory requirements.

EasTone Telecommunications

China Mobile last year agreed to pay as much as NT$17.8 billion ($557 million) to buy a 12 percent stake in Taiwan’s Far EasTone Telecommunications Co., and the Chinese carrier in 2006 bought Hong Kong’s People’s Telephone Co. to expand overseas.

China Mobile Communications, which owns 74 percent of Hong Kong-listed China Mobile, bought a 19.9 percent stake in Phoenix Satellite Television Holdings Ltd. in 2006. A year later, the phone company acquired Paktel Ltd., a wireless carrier in Pakistan, its first purchase outside Chinese territory.”