I was going through some old books at home, looking for something to read on a lazy Sunday morning and stumbled upon an old book titled "Deal from Hell: M&A lessons that rise above the ashes" where the author, Robert F Bruner, outlined views views and merger failures and what he thought of the failures.
Just like when you go through an old album, you just can't put it down.
Anyway, I thought that it would be interesting to look at some of his findings and compare them with the M&A that has happened ("SapuraKencana Merger") and the M&A that might happen (the CIMB, RHB & MBSB proposed merger).
Robert F Burner, in his book outlined 6 causes for merger failures. And merger failure does not mean that the merger itself did not materialise, but rather a merger that resulted in a destruction of market value, financial instability, impaired strategic position, organization weakness, damaged reputation and violation of ethical norms and laws. In other words, post merger mess ups.
Based on the recent performances of both the fundamentals and share price of SapuraKencana, I definitely do not think that the merger was a failure. I thought I would also throw in the proposed mega bank merger to see how does it stack.
1. The business and or the deal were complicated.
SapuraKencana: Although the terms of the merger appeared complicated with all the SPV, share swap and pricing and swap ratio, it actually was a very straightforward deal. Two companies of almost equal size (approx RM6 billion each) decided to get together. The valuation was done such that Kencana was valued just slightly more than Sapura, which would give the shareholders of Kencana slightly above 50% shareholding in the new entity and Sapura shareholders slightly below 50%. Oh by the way, since the valuation was being done, the price was set at premium to the historical prices of both companies, so on the onset, both shareholders did not lose (and since the share price did not drop, both shareholders did in fact win). That was it.
Business wise, both companies were in the same industry doing complimentary things. I did not expect any major system upgrades and changes in the business model had had to be made. This 'no-complication' enabled the people on the ground to quickly focus on business rather than spending too much time on integration.
Mega Bank Merger: In my view, it has the potential to be uncomplicated and straightforward. There is one common major shareholder who is EPF would could make quick decisions. I have a feeling it is not going to be done by purely cash. My reason is, firstly, CIMB, like many other banks under Basel regime, would be holding cash dearly to meet the various threshold. Secondly, the share swap deal allows flexibility to assign premium much easier than cash. In the cash deal, the premium would have to be realized, in a share swap deal, the premium is on paper. If the merger decide to follow the SapuraKencana route, they may use a SPV which would use a combination of share-swap and cash to buy the businesses of the three, and if they can convince some financiers to lend them the money for the cash portion that even better as it is almost akin to a 'leveraged buy-out' by the existing shareholders. If you need more info on the, drop me an email on the comment box and I will send you my lengthy opinion.
Business wise, this is slightly a different story that the SapuraKencana deal. In the SapuraKencana deal, the merged entity was going to be involved in a rapid-growth (albeit very risky) and margins that are big enough to absorb any temporary operational slack during the transition period. The focus was on boosting the revenue by getting more contracts. However, in the Mega Bank merger, the industry is considerably more mature than the oil and gas industry in Malaysia. Margins are very competitive and operational efficiency is the key to avoid failure. Slacks in the operations during transitional period post the merger (if it happens) could attack the bottom line very quickly. Nonetheless, to be fair, both RHB and CIMB are seasoned acquirers so they both should know how to handle the business transitions pretty well.
2. Minimum flexibility or rigid business system
SapuraKencana: The SapuraKencana have plenty of flexibility in its business system as it is in a rapidly growing industry (in Malaysia) where the business system are fluid to adapt to the changing business environment. The business system of the merged entity, which then included a wider spectrum of services along the value chain, appears to have plenty of slack to act as buffers to any problems that a business unit might face.
Mega Bank merger: Banking system is mature and is much less flexible with plenty of regulations influencing its capital and how the business is managed. This s an areas which the dealmakers and project managers need to look at carefully.
3. The new 'merged' entitiy had an elevated risk exposure
SapuraKencana: A larger balance sheet and more product offerings does not appear to increase the level of risk of the merged entity. Although the management seemed to be taking more projects which may have riskier profile, the size of the company appears to have mitigated some of the additional risk.The decision making process does not change much as the decision maker largely left with the two 'owners', well one now. As the decision maker is largely the same people, I don't expect the risk appetite going to change significantly.
Mega bank merger: They all appear to share the same risk profile. Does not seem to be an issue here. The decision making process in these seasoned banks would also have been very mature and committee driven. Again I don't expect the management to be taking on a significantly more risk than before.
4. Biased decision process due to recent sucesses, pride, overoptimism etc.
SapuraKencana: Many M&A were driven by hubris, or ego, and hence why many M&A failed. Ego and pride create bias decisions. In the case of Sapura Kencana, considering the ultra high personality of the two owners, it was very exciting to see how both owners put this aside and put business first. Between them, there was common ground and that was to make more money by having a bigger business.
Mega Bank merger: They have Nazir to keep things in check. Enough said :-)
5. Business is no longer as usual
SapuraKencana: Business was definitely as usual after the merger, albeit much bigger. Same expectations and same business process, in principle.
Mega Bank merger: They are buying into similar business so it should be business as usual post merger.
6. The operational team broke down due to cultural or political differences.
SapuraKencana: The two owners were so commanding that they could ensure that the people and the culture merge for the good of the company. There was no major talks of camps and warlords emerging from within the merged entity.
Mega Bank merger: Again I would rest this on the experience of CIMB and RHB in handling cultural integration.
In conclusion, SapuraKencana fits the bill of not having any of the causes for a failure in a merger. Thsi is clearly translated into skyrocketing share price movements as a reward and vote fo confidence from the investing community.
As for the new bank merger, we will just have to wait and see if they could circumnavigate these sinkholes succesfully.
Showing posts with label Investing. Show all posts
Showing posts with label Investing. Show all posts
Sunday, August 3, 2014
Thursday, July 31, 2014
SYWBS Part 4: Putting it all together
Lets recap.
1. Know yourself and what you want to do
The first thing we want to do before we invest is to get our objectives clear. In order to do that we would need to know our investment horizon: long term or short term. This horizon is not dictated by our preference, really, but rather our constraints in terms of capital, the need for cash (liquidity) and our time to monitor the market.
In this 'simulation' I would assume that the investor (Lets' give our hypothetical investor a name: Adam) does not have the time to monitor the shares hourly. At best daily at the end of the day or weekly. He has a day job that occupies his time. He has some money that he sets aside each month from the paycheck for investment purpose, so he does not need regular cash from his investments. Based on that, the investment horizon would be a mid to long term and by that I would mean he would not need to touch his investment money for at least 12 months.
2. Know what you got to do (strategy)
As Adam does not have the time to punt the market, he would need an alternative investing strategy and that would be building a portfolio. In our previous article, we touched on a top down strategy as one of the thought process that we could apply in trying to narrow down our investment focus.
The strategy may be different if Adam has the time to say monitor the market on full time basis. For the time being, let's stick to the top down approach.
3. Do what you got to do
The first thing that Adam would need to do is decide which market would he want to invest in, i.e. the top of the top. Assuming that Adam is only investing in Malaysia, that would mean he has to select which market sector to invest in. Well, the choice is not as easy as it seems. There is activity-based sector (utilities, O&G, Banking) and there is cross-activity size-based sector (Large Cap, Mid Cap, Small Cap, Fledgling). So where does he start?
Well, there is where the economic outlooks and reports that appear in the newspapers come in handy. And more tellingly, we have indices to help Adam decipher the health and wealth of a particular sector. Bursa Malaysia, via its index series has the following sectors indexed:
- FTSE Bursa Malaysia KLCI - 30 largest companies in FTSE Bursa Malaysia EMAS Index (FBMEMAS) by full market capitalisation.
- FTSE Bursa Malaysia Mid 70 Index - next 70 companies in FBMEMAS.
- FTSE Bursa Malaysia Top 100 Index - sum of constituents in the above two indices.
- FTSE Bursa Malaysia Hijrah Shariah Index - 30 largest Shariah-compliant companies in
- FBMEMAS screened by Yasaar Ltd and the Securities Commission's Shariah Advisory Council
- FTSE Bursa Malaysia Asian Palm Oil Plantation Index (USD and MYR) - companies earning substantial proportion of revenue from palm oil activities in the Asia Pacific Region.
- The FTSE Bursa Malaysia EMAS Index - constituents of the FTSE Bursa Malaysia Top 100 Index and FTSE Bursa Malaysia Small Cap Index.
- FTSE Bursa Malaysia EMAS Industry Indices - 10 Industries, 19 Supersectors and 39 Sectors.
- FTSE Bursa Malaysia Small Cap Index - top 98% of the Bursa Malaysia Main Market excluding FTSE Bursa Malaysia Top 100 Index constituents.
- FTSE Bursa Malaysia EMAS Shariah Index - Shariah-compliant constituents of the FBMEMAS that meet the screening requirements of the SAC.
- FTSE Bursa Malaysia ACE Index - all eligible companies listed on the ACE Market.
- FTSE Bursa Malaysia Palm Oil Plantation Index - based on FBMEMAS and comprising companies earning a substantial proportion of revenue from palm oil activities.
Broad based
Lets assume that Adam was interested with the news that Norges is investing more in Mid and Small cap companies in Bursa Malaysia. He would therefore would like to know more about the companies within this categories that would be on the radar of Norges. But since there are hundreds of companies out there, how could Adam narrow down the list further? His monthly investment coffer cannot buy them all.
But could he? Technically, he can. He can buy the exposure into the sector by investing in a collective investment scheme that invest in the same sector and share the same objective (of course after reading the prospectus). He can look up the unit trust funds that invest in small and and mid cap companies and invest there. There are plenty of unit trust agents who could advise him over a cup of coffee and an EPF form in hand :-).
But if that is not his cup of tea, he could also try investing in a close-end fund. Which is also a collective investment scheme but is close-end (as opposed to the open-end unit trust schemes) and is listed and traded on Bursa Malaysia. We have only one example on Bursa Malaysia and that would be icapital.biz Berhad. Based on its annual report, the investment strategy are : "Your Fund invests in undervalued companies which are listed on the Main Market of Bursa Malaysia Securities Berhad (Bursa Securities) and the ACE Market of Bursa Securities". Well, that investment 'universe' is a bit too wide for Adam's Small and Mid cap strategy hence no can do...sigh.
He can try investing in an exchange traded fund ("ETF"), a passive collective investment scheme that tracks an index. An ETF that tracks the (say) FTSE BM Mid 70 index and FTSE BM Small Cap Index would fit in nicely in this strategy. Investing in ETF, would relieve Adam of the headache of punting in the sector.Let's have a look at the ETF's that are available in Bursa Malaysia:
List of ETFs
Equity ETF
Equity ETF (Shariah Compliant)
Fixed Income ETF
“We advocate being selective, picking beneficiaries of compelling investment themes or with specific event catalysts. These include Deleum, Barakah Offshore and Malaysian Resources Corp Bhd (MRCB),”
In order to narrow it down further, Adam should perform the fundamental analysis (and technical too) on these companies before buying the shares. A topic for next time.
Well, that is all for today folks. Till next time :-)
Wednesday, July 30, 2014
Norges investing more in Malaysia
Here is an interesting bit of news that came out in the Star Newspaper today 31 July 2014:
Norwegian fund Norges allots RM800mil to invest in Malaysian small, mid-cap stocks
A market source said the foreign fund appointed Eastspring Investments Bhd about a month ago and was investing in general equity, with a preference for the small to mid-cap equity space.
“There are no specific guidelines as to which sector Norges is keen on. It wants to look at good companies and it so happens the local small and mid-cap space is doing well this year,” the source said.
Norges has been one of the largest foreign fund investor in Malaysian equities since 2010.
At the time, the fund was already sitting on a paper gain of some RM600mil, with its entire holdings in Malaysia valued some RM2.3bil. Its performance in Malaysian equities was attributed to the big run-up in many of the small oil and gas companies since last year.
-end quote-
Many NEW investors would be asking this question: So, how can I benefit from this?
Well, in order to benefit from this, you would need to outsmart the fund manager that is managing this RM800 million bonanza.
Unless you have a crystal ball that monitors the investment committee of the fund manager, you would probably have not got a clue or very little.
Well, lets look at the information we have from the news paper above:
1. The investment mandate is to invest in small-cap companies (companies with small market capitalisation).
2. The investment is managed by a fund manager.
Based on the "Information 1" above, the easiest step would be to put our money into small cap unit trust funds and hope the fund manager of our unit trust can outsmart the managers of Norges' money. If there is an ETF that tracks the small cap fund, then we can also take this investing route via the ETF as the ETF would remove the headache of punting.
Boring? Well, we can always try our 'luck' in a more active investing by using the second piece of information, "Information 2" above these funds are run by institutional fund manager. If we want to try to narrow down our investment selection, we best know the nature of the fund manager.
1. Fund managers usually are run by mandates.
In this regards that means investing in small and medium companies. Larger cap companies, although they would be very attractive like for example SapuraKencana could fall outside the mandate and would not attract this investment despite all the favorable outlook. The fund manager would not score any point if they invest outside the mandate, in fact usually they would avoid it as they risk being accused of going beyond the authority given to them - a very very bad thing for a fund manager. The first thing in narrowing down your focus is to look at the mandate.
2. Fund managers usually have a benchmark to beat.
In rewarding a fund manager, the investors would need to be to assess the performance of the fund manager and that means assessing the absolute return and relative return performance of the fund manager. When it comes to relative performance assessment, that means comparing the performance of the portfolio of investments of the fund manager against an index, usually. In this case, it should be a small cap index which are provided by various index providers like MSCI, FTSE and the works.
In order to beat the index, the fund manager invariably would have to keep a significant portion of their investment in the index stocks as a cushion in trying to beat the index. Therefore, the next place to look at would be the stocks that make up the small cap indices. The is a chance that some of the Norwegian money turning up there.
3. Fund managers usually target companies with higher (or potentially higher) liquidity (relatively speaking)
Fund managers, like other investors, would need to convert all the paper gain into paper money: cash. That means liquidity plays a role as the last thing a fund manager wants to to be holding a dead stock which no one wanted - big messy publicity that would be. Liquidity or persistent active trading would be on thier screening criteria.
4. Fund managers usually have a much much longer holding period
The Norwegian money can stay for a very long long time in a particular stock.
5. Fund managers may look for companies with better fundamental analysis to better keep their job
No one has a crystal ball and that includes the fund managers. In order to make sure their make sound decision, or at least appear so to the investors, they need as much justification as possible. There is a term in the industry called "Cover-Your-Ass investing".
One of the best cover would be fundamental analysis. There is no guarantee that any price derived from fundamental analysis would actually materialize but it would give the fund managers something to show the investors if the price tank. Fundamental analysis would also be used to convince the investors from pulling out from the stock if the market is feeling a bit bearish.
Therefore, the third place for you to look at are companies with solid fundamentals as these would be the same target for the fund managers. Bust as we mentioned in item 4 above, the institutional money has a very very long staying power so be prepared to wait in some cases.
Monday, July 21, 2014
SYWBS Part 3: The Other Investors
This is the third part of the "So you wanna buy shares" series. You may read the previous two parts here:
1. Part 1: Getting to know the share buying 'battle field' and what affects share price movements
2. Part 2: Getting ready for the opening gambit, a top down approach, and the importance of selecting the right industry to invest in.
Before we get down to narrowing down our stock selection and making our opening gambit, I think is it better that we take this opportunity to get to know the 'opponents' on the field.
As I have mentioned in the previous articles, 'playing' the stock market is not dissimilar to being in a battle of wits with other players on the field.
To quote Sun Tzu:
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
― Sun Tzu, The Art of War
So, who are your 'enemy' and who are you allies? Well in this game, no one is your enemy forever and none is your ally forever too. There is no loyalty except to profit and money. So your enemy today could be your ally tomorrow. It is therefore imperative that we spend some time getting to know the others.
The players in the market have been describe in many way and facets.Some categorized them based on their trading activity (passive investors, active investors, speculators), some based on strategy (long term investors, short term investors / punters), and some based on type. I prefer to start with the type of players, which I have dividend into the following categories:
1. Institutional player
2. Retail long term player
3. Retail punters
4. Market manipulators
Institutional players
Who: Unit Trust Funds, Government Linked Investment Companies (EPF, KWAP, Valuecap, Khazanah, Tabung Haji, PNB), Insurance Companies, Takaful companies, Foundations
Size: Very very large. This category of investor accounts for more than 2/3 of the stock market
Ticket size: very very large
Motivation: Keep the job. Hahaha. Although it might sound funny, but this is largely true as the funds are run by professional managers who are paid as long as they have the job. That means there are other factors than the immediate task of making the trading profit (which is more difficult as when they move, everyone will be alerted).
Investment horizon: Very long term
Investment style: long term portfolio strategy. This is based on a mandate for each fund, like balanced fund, asian equity and the likes. So even if a share is hot some of these investors would not be able to buy it if it is not in the mandate. Likewise, even if a share is cold, they might need to buy them to meet the mandate. This mandate driven strategy is evident when, for example, a stock suddenly gets to be included into the KLCI index (I think SapuraKencana had this scenario). When a share gets included in the index, all the funds that has track the index may need to buy the share just so that they can ensure they track the index well. Likewise, if a share gets thrown out from say a Shariah index, you might see large and persistent selling pressure on the share as Shariah funds seeks to exit from the shares, even if it is making huge trading gain. They simply cannot go against the mandate. Profit is secondary, in a way.
Retail long term players
Who:Wealthy high net worth individuals (or corporations), mostly. They are normally assisted by experienced remisiers, brokers are financial consultants.
Size: Large.
Ticket size: large. Due to the large size of their capital, they have to trade in larger volume to make up the return.
Motivation: Make long term stable return in terms of trading gains and dividends.Dividends becomes a significant consideration due to the size of their capital
Investment horizon: Medium to long term
Investment style: A mixture of long term portfolio strategy and opportunistic punting. These people are well informed and could take sizeable position. Their trading sometimes large enough to move the share price and could affect the trend of the share that appears on the technical charts.
Retail punters
Who: Wealthy and less wealthy individuals, mostly. Because punting requires a constant eye on the market, they are dominated by traders, remisiers and some career market punters.
Size: Small to large.
Ticket size: Flexible. As punters wants to ride on the wave, their size can vary depending on their appetite and risk assessment for each trade. But their size are not normally large enough to create and sustain a price wave, but they can add to prolong a wave. They cannot be too big as that would make it difficult for them to exit the wave without breaking it midstream.
Motivation: Make trading gains and the hell with everything else.
Investment horizon: Short
Investment style: Constantly picking stock on a daily basis. Focus more on trend rather than fundamental analysis.
Market manipulators
Who: These dark shadowy characters exists and sometimes some of the are caught by the regulators. To ignore them is to seek for death in the stock market.
Size: Large.
Ticket size: Flexible. The ticket size would be designed to be large enough to move the share price but small enough to run undetected.
Motivation: Make trading gains and the hell with everything else. These people usually work with inside information in hand and with the financial support of some opportunistic investors.
Investment horizon: Short
Investment style: They work to fool the rest of the investing public into buying (or selling) shares at artificial price which they know is not sustainable once they are out of the picture.Because they need to be able to have control over the majority of free-floating shares with the limited capital that they have, they usually target penny stocks or some fairly illiquid shares.
If you are a beginner in stock market investing, you need to know investors and over time, you would be able to sniff them out with experience. As we mentioned before, these people could be your enemy or your ally depending on where you are when they come in.
See you next time :-)
Invest smart peeps!
-----
You can read previous articles in the "So you wanna buy shares" series by clicking the link below:
1. Part 1: Getting to know the share buying 'battle field' and what affects share price movements
2. Part 2: Getting ready for the opening gambit, a top down approach, and the importance of selecting the right industry to invest in.
We share as the more we have the merrier, kan?
Saturday, July 12, 2014
CIMB and the 'mega' bank merger
I must admit. It caught me by surprise.
PublicInvest Research reported:
"CIMB Group (CIMB), RHB Capital (RHB) and Malaysia Building Society (MBSB) released a joint statement merely indicating that they had received Bank Negara approval to commence discussions with the aim of merging the businesses of both RHB and CIMB as well as creating an enlarged Islamic Banking franchise with MBSB. It further went on to say that the three parties have entered into a 90-day exclusivity agreement to negotiate and finalize pricing, structure and other relevant terms and conditions for a proposed merger of the three entities"
"...which would see the creation of the largest banking group in the country with a combined asset base of RM613.7bn and nudging it ahead of current incumbent, Maybank. "
It would be interesting to see how does this M&A stack up against the conventional wisdom of M&A.
1. Post announcement, the aquiree's share price increases while the acquirer's share price is either stagnant or drops a little.
"Despite the large numbers of bank mergers over the past 25 years, academic studies have failed to produce consistent evidence of value enhancement, cost savings and economies of scale for acquirers" - Effect of Bank Acquisitions on Shareholder Returns By Alan P. Mayer-Sommer, Sharon Sweeney and David A. Walker.
Many textbooks on M&A would state that results of past M&A showed that, more often than not, the share price of the acquiring company would either be stagnant (indifferent) or suffer a negative movement. The acquired companies, more often than not, will see positive price movement, indicating immediate value creation for the investors.
In the case of this mega bank merger, the term merger assumes that there is no acquirer per se as everyone in a merger is equal. However, the investors might see it differently, stapling the label acquirer to the largest member of the merger party (or who they perceive as the dominant entity in the pack).
In this case, it is my opinion that the investors had picked CIMB, the largest and deemed more influential of the three to be 'designated' as the acquirer. And this seems to be supported by the price movements of CIMB around the period of announcement, as can be seen below where it dropped the day after the announcement.
Source: Bloomberg
With regards to the acquiree companies, I recall a chat I had with one of the owners of an investment bank in Malaysia who said that the strategy for him was to make the bank very attractive for another bank to acquire. Well, Looking at the price movements of the 2 other companies in the mega bank merger, his strategy seemed to have a lot of truth in it.
Source: Bloomberg
Source: www. thestar.com.my
Why does this happen? Well, this 'rule' on the share price of the acquirer and acquiree is a well known text book rule which are taught at almost every M&A program. The holder of the bulk of the shares in these companies would be professional fund managers who would have more probably than not, received such teaching of the rule. And as with the share price, it is driven by expectations and subject to by the self-fulling prophecy principle; when enough investors believed and acted on the rule (prophecy) of price movement in M&A above, the prophecy is fulfilled and made into a fact.
Well, that is one of the ways we can use to the try to understand (and in some cases, predict) the price movement of the shares involved in an M&A.
Another logic behind the price movement states that the acquirer is expected to pay a premium for the shares of the acquiree companies in order to entice the shareholders of the acquiree companies to part with their shares. In that sense, the expectation of a higher price for the consideration is very strong to some investors. Therefore, people would buy to cash in on the premium later.
Hypothetically speaking, if I have some shares in the acquirer company and the acquisition will be made through a share swap, where the shares of acquirer company will be offered in exchange for the shares of the acquiree company (which most likely be priced at a premium to the current price), it would probably make sense for me to sell my acquirer company shares and buy the shares of the target company, hoping that at the end of the day, I would still end up with the shares of the acquirer company after the share swap, but now at a 'discount'.
On top of that, in the analysts have been doing fundamental valuations on the acquiree companies RHB and MBSB for a while now. Whether or not the prices of the acquiree companies had followed the fundamental valuation were inconclusive at best, and judging by the reports that RHB is the most undervalued of the three (based on price to book ratio valuation) suggested that the price did not. However, this piece of major news has raised investor's expectations that more people will pay attention to the information on 'undervaluation' and cause the price to move towards a favourable valuation. One group of people who definitely have to pay attention to this 'undervaluation' would the negotiation party from CIMB who would have to factor this in when arriving at the consideration prices.
Well this is a knee jerk reaction immediately after the announcement. As the investors are able to gather themselves and digest more of the information, the price should adjust accordingly.
Okay, I have to leave it there for the moment and continue with the rest of the story on a later date, where I hope to discuss the following wisdom of M&A:
PublicInvest Research reported:
"CIMB Group (CIMB), RHB Capital (RHB) and Malaysia Building Society (MBSB) released a joint statement merely indicating that they had received Bank Negara approval to commence discussions with the aim of merging the businesses of both RHB and CIMB as well as creating an enlarged Islamic Banking franchise with MBSB. It further went on to say that the three parties have entered into a 90-day exclusivity agreement to negotiate and finalize pricing, structure and other relevant terms and conditions for a proposed merger of the three entities"
"...which would see the creation of the largest banking group in the country with a combined asset base of RM613.7bn and nudging it ahead of current incumbent, Maybank. "
It would be interesting to see how does this M&A stack up against the conventional wisdom of M&A.
1. Post announcement, the aquiree's share price increases while the acquirer's share price is either stagnant or drops a little.
"Despite the large numbers of bank mergers over the past 25 years, academic studies have failed to produce consistent evidence of value enhancement, cost savings and economies of scale for acquirers" - Effect of Bank Acquisitions on Shareholder Returns By Alan P. Mayer-Sommer, Sharon Sweeney and David A. Walker.
Many textbooks on M&A would state that results of past M&A showed that, more often than not, the share price of the acquiring company would either be stagnant (indifferent) or suffer a negative movement. The acquired companies, more often than not, will see positive price movement, indicating immediate value creation for the investors.
In the case of this mega bank merger, the term merger assumes that there is no acquirer per se as everyone in a merger is equal. However, the investors might see it differently, stapling the label acquirer to the largest member of the merger party (or who they perceive as the dominant entity in the pack).
In this case, it is my opinion that the investors had picked CIMB, the largest and deemed more influential of the three to be 'designated' as the acquirer. And this seems to be supported by the price movements of CIMB around the period of announcement, as can be seen below where it dropped the day after the announcement.
Source: Bloomberg
With regards to the acquiree companies, I recall a chat I had with one of the owners of an investment bank in Malaysia who said that the strategy for him was to make the bank very attractive for another bank to acquire. Well, Looking at the price movements of the 2 other companies in the mega bank merger, his strategy seemed to have a lot of truth in it.
Why does this happen? Well, this 'rule' on the share price of the acquirer and acquiree is a well known text book rule which are taught at almost every M&A program. The holder of the bulk of the shares in these companies would be professional fund managers who would have more probably than not, received such teaching of the rule. And as with the share price, it is driven by expectations and subject to by the self-fulling prophecy principle; when enough investors believed and acted on the rule (prophecy) of price movement in M&A above, the prophecy is fulfilled and made into a fact.
Well, that is one of the ways we can use to the try to understand (and in some cases, predict) the price movement of the shares involved in an M&A.
Another logic behind the price movement states that the acquirer is expected to pay a premium for the shares of the acquiree companies in order to entice the shareholders of the acquiree companies to part with their shares. In that sense, the expectation of a higher price for the consideration is very strong to some investors. Therefore, people would buy to cash in on the premium later.
Hypothetically speaking, if I have some shares in the acquirer company and the acquisition will be made through a share swap, where the shares of acquirer company will be offered in exchange for the shares of the acquiree company (which most likely be priced at a premium to the current price), it would probably make sense for me to sell my acquirer company shares and buy the shares of the target company, hoping that at the end of the day, I would still end up with the shares of the acquirer company after the share swap, but now at a 'discount'.
On top of that, in the analysts have been doing fundamental valuations on the acquiree companies RHB and MBSB for a while now. Whether or not the prices of the acquiree companies had followed the fundamental valuation were inconclusive at best, and judging by the reports that RHB is the most undervalued of the three (based on price to book ratio valuation) suggested that the price did not. However, this piece of major news has raised investor's expectations that more people will pay attention to the information on 'undervaluation' and cause the price to move towards a favourable valuation. One group of people who definitely have to pay attention to this 'undervaluation' would the negotiation party from CIMB who would have to factor this in when arriving at the consideration prices.
Well this is a knee jerk reaction immediately after the announcement. As the investors are able to gather themselves and digest more of the information, the price should adjust accordingly.
Okay, I have to leave it there for the moment and continue with the rest of the story on a later date, where I hope to discuss the following wisdom of M&A:
- "There is no clear success directly attributable to the merger, many post merger successes were due to the rapid growth and prosperity in the industry that it is in." Where we will look at
- What do I mean by successful?
- What made me think that the SapuraKencana merger successful.
- What were the factors that contributed to the success of SK merger? Industry, culture, speed, objective of merger, leadership
- Would the the current mega bank merger have that?
- Synergy is elusive to calculate, even more elusive to realise. Bigger simply means just that, bigger. Bigger headache.
- What to expect in the coming months, negotiations, announcements and motivations
SYWBS Part 2: So you still wanna buy shares...
In the previous post, I shared my belief that:
1. Share price move based on expectations of making profit
2. People invest with the expectations to make profits
3. The starting point of investment is pitch black and there are thousands of choices and noises in the market.
4. Expectations are elusive and unpredictable, sometimes (most of the times) it defies logic and reason.
5. Most of people starting out have limited capital, so best to first see the surrounding, the battlefield, before making any move. That distinguishes between the brave and the idiot (while not forgetting idiots do have some luck sometimes).
6. One of the ways, by which we can try to 'see' in the dark or feel the surrounding, systematically is by a top down approach.
7. Top down approach starts with industries within the country. Actually you can even go higher with which country, but i will explain this on if anybody asks. For the time being, we shall keep it local.
So lets continue with the top down approach and look at industry.
A country's economy is divided by industries and each industry has its own 'health'. The health of the industry depends on many things, internal and external. I am not going to explain how to assess the industry here, like the Porter's Five Forces etc, but sufficient for us to understand that we need to find out which industry harbors the most expectation to be prosperous.
Why do we need to find this out? The logic behind this is that the industry that is prosperous would give more chances for the companies within it to be prosperous. Therefore, as the company prosper, the shareholders would prosper alongside it too. That is the general nature or logic of the human brain.
The need to to have the ability to systematically/ logically narrow down choices above is further enhanced by the fact that the human beings are limited by capital and brain power. Capital is limited in a sense that it is no one person / organization has enough capital to be invested everywhere. Choices has to be made as to where be to invest in. More importantly, in general, the decision making process of investments are done by humans and the ability to have a multiple lateral analysis is very limited.
As I have argued before, the prices of shares are determined by expectations of trading profits. It is not determined by fundamental or analytical calculations. If someone had carried out a fundamental or analytical calculations and comes out with a price, that price is not going to be force fed into the market / system. They can't do that; they can't determine the price. Otherwise how do we explain all the price targets? If the prices of shares are determined by these calculations there will be no price targets as the next price will be set at that.
In my eyes, the fundamental (FA) and analytical analysis (TA), calculations and outcomes feeds into the expectation of the share concerned. And the magnitude of this expectations depends on the visibility of the shares and how much people believe in it. Take for example a share which is trading at $1.00 each. We did our own FA or TA and arrived at a price target of $2.00 each. GREAT! Really? Not really.
Our price target above are not visible to others. That means that others does not share our price target hence the magnitude of that expectation that the price will increase to $2.00 has only the strength of whatever capital we have.
But if an analyst comes out with his/her own calculations and sets the price target to $0.50 and that target is then published in the newspaper, it would have an impact on the share price of the company as the visibility of this opinion would affect the expectations of many more investors.
You could probably be right and the analyst wrong, but since the price is determined by expectations, the price would more probably be swayed by the much larger expectations generated by the analysts.
This also explains how can one share have multiple target prices from multiple credible analysts. Each analyst may have been correct in arriving at their target price calculations but the actual price movement is determined by how much and how many people believed in the upside (of 50%, 20% or even 100%).
So back to the industry selection above, it is important for us to identify the industry that is most visible for the right reason. The more visible the industry is the more investors will be looking at the companies within the industry.
Take for example the oil and gas industry. For the past few years there has been many good news about the industry, mainly that the oil price is at a very high and profitable level. That made it stand out and make people believe that there is more likelihood of success for the companies involved in this industry. And the investing public expects that it is going to generate more and more attention and hence attract more investing money.
In general, the expectations on making a profit in oil and gas companies should be high because most of the factors that would be fed into the the expectations of rising share prices are all there. The fundamental calculations should be looking good as the industry is doing well. And as sentiment translates into positive share price movements, the TA would also be showing a good sign.
So first, pick your industry or industries.
But before we can make our pick, we need to know how to identify which industry is doing well. The first obvious source would be the newspapers and and other sources of economic outlook, including analyst reports. Look at how the industry is being reported in the news and around us.
You can also look at the indices representing these industries. What has been the trend and whether the indices has been growing in line with all the positive news out there. Comparing the indices against good news about the industry is a good way to gauge the level of visibility of the industry in the eyes of the investing public; whether the investors are paying attention the companies within that industry.
- to be continued-
Next: how do the fund managers usually narrows down which company to buy within a particular the industry.
Next next: How fund managers build equity portfolio and how you can do it with the combination of ETF and shares.
Friday, July 11, 2014
SYWBS Part 1: So you wanna buy shares...
So, where do you start?
I guess you may have read other blogs and articles about investing, and if you had done so, then some of the things I am going to say here would be a repeat.
1. Objective: Why do you want to do this?
To make money or profit. To exit more than you had before. You don't buy shares so that you can participate in setting the right price for shares. That would be stupid. You want to buy and trade in shares so that you make more money than you had before.
Simple objective but not so simple way to do it.
2. Why is it so difficult to make money on the stock market then?
Everyone has the same objective. And since it is a zero sum game (save for the dividend), you have to lose for them to win, and vice versa.
You are most probably quite insignificant (especially when you are starting). This is in terms of capital. The entire market is way to big for you to influence and worse some of the other players play dirty. They are significant enough to manipulate the share price, commonly known as goreng sampai hangus..You wanna get on the 'goreng' part and leave before you 'hangus'.
The share price of a company is almost unpredictable, especially if you do not have the technical or fundamental tools. It would be like walking blind without a stick even to guide your way. The share price is subject to the expectations of everyone else and since you cannot read their minds, you would not know. Therefore, without any knowledge on how to 'feel the surrounding' you are basically gambling. You could win with almost equal luck as a flip of a coin (I vaguely remember reading a study done on this).
3. The first thing is to know yourself
Like I said earlier, buying shares is not unlike going into a battle (of wits). And as with any battle, you gotta to have to things, a great deal of knowledge about yourself and a plan.
You already know what is you objective is: to make money. However, here you would need to be a bit more specific. Do you need to make profit everyday, every month or once a year maybe. This is determined by your cash need and how long can you go without the cash you are using to invest. There is no right or wrong answer, as there is no guarantee that you can make any profit any day, month or year. But this would determine the kind of time you need to be monitoring the market and the kind of shares you can buy.
In my case, I cannot be stuck on the screen every minute, so I guess I need to make my profit on a monthly basis. Not that I need the profit for my monthly expenses, rather for the purpose of discipline. I can go for at least one year without the capital back in my pocket.
Risk level? The moment you decided to buy shares that means you are on the above average risk takers already, daring and brave. The only thing right now is to not make ourselves foolish instead, or even stupid.
4. The second thing to do is to 'un-blind' yourself systematically
A fool falls down a lot, mostly for the stupidest reasons. That is akin to being blind and refusing to learn how to feel with your other senses. Well, the 'brave' also falls down sometimes, it hurts just as much, but as he are able to feel the surrounding, he would fall less (usually a lot less) than a fool.
There are many ways to learn about the or feel the stock market. Two of them are 'top down' and 'bottom up' approaches. I like the top down approach in general as a systematic way to feel the market.
First we start with the entire market, hundreds and hundreds of companies with hundreds and hundreds of shares. It is not uncommon for first timers to then quickly look at the most active counters as a guide for the choice of shares to invest in. I don't go for that because usually by the time the counter gets on that list, the meat is already gone. Meaning the price is already stabilizing, coming down or about to come down.
If you have lots and lots of money and you do not know at all what to buy, you could buy the entire market, meaning you would buy ever types of shares there are in the market or more realistically, the shares in the indices. That way you will be taking the market risk and return. You will make profit when the whole market makes profit.
Does it mean you need to have millions to to this? The answer is: not anymore.
You can 'buy' the exposure to the entire market by buying ETF from as low as a couple of hundred ringgit. For more details on ETF and how it works, you may visit my earlier posting here.
But if we want to take a higher risk and hope for a higher return (or have enough money for just one or two stocks), then we have to narrow down our selection further.
The entire market is then dividend by industries. Oil and Gas, construction, banking and such. Within these industries are companies (and shares) that does business; some more profitable than others and some loses money.
The natural thing to do is to pick an industry that is gathering most positive attention from other investors. Remember, share price moves based on expectation and expectations can sometimes be totally different than the reality of the fundamentals.
How do we find this out? Which industry is getting the attention? Well, we need to read the newspapers, trading forums and the likes and judge which industry is getting the most airtime. It could be oil and gas, it could be banking it could be property or plantation. You make your call.
- to be continued-
Monday, July 7, 2014
SPAC, a view post QA
REMINDER/ DISCLAIMER: THIS IS NOT A RECOMMENDATION TO BUY OR SELL HIBISCUS OR ANY SPAC OR ANY SHARES. IT IS INTENDED TO EDUCATIONAL AND DISCUSSION PURPOSE WITH A VIEW TO PROMOTE MORE ANALYTICAL INVESTING AND LESS GAMBLING.
I decided to continue to share more of my understanding of SPAC due to the very encouraging responses I received on the previous two postings on SPAC, the first which discussed on the nature and understanding of SPAC and the second one which talked about the enigma of trying to grapple with the valuation of SPACs.
I started by listing down all the SPAC in Malaysia again. While the imeediate number that came to my mind was 3, I stopped writing after the names Sona and Cliq. I hesitated to include Hibiscus as i recalled that it had completed its qualifying acquisition (QA).
The question that I had to answer was: was Hibiscus still a SPAC or should I now consider it as an oil and gas company? The answer to this question it only then would I be able to appropriately understand, assess and evaluate the company.
The first thing I checked was the Bursa Malaysia classification. Nope, Hibiscus is no longer classified as a SPAC. How about Bloomberg? When I checked on 7 June 2013, it is stated as Sector: Financials; Industry: Specialty Finance. Sounds like SPAC to me. Well now we have two different 'market experts' with two different opinions on the nature of the
But the nature of the company is not as simple as a reclassification on the board. In the actual sense, it should be determined by its business model.
As I had argued in previous posting, I view a SPAC before the QA as a private equity fund. The question is whether post QA, does a SPAC cease to be a private equity company and become a normal operating company or does it continue to be a private equity company. The answer will change the perspective in which I view a SPAC, the risk assessment and the evaluation (some may say valuation).
Let me try to explain why. A private equity company makes money from buying, investing and finally exiting the investment. Cashing in from the dividends and proceeds of the sale of the investee company. It does not need to hold a majority stake as it is more interested in the ability to groom and sell the company later rather than managing and living of the profits and cashflow of the company. The proceeds of the sale of the initial investment will be used to find another acquisition which it will try to replicate the success with the initial investments. The value of the investment in the private equity will grow based on the size of the assets it has and the quality of the private equity will depend on the liquidity or ability to convert those assets into cash.
A normal operating company, especially a normal operating company listed on an exchange has to have a business model and business operations that are in perpetuity. The operations must be on going concern basis and the company must have control over the assets (most importantly cashflow) and the business direction of the operations and assets, particularly when it comes to paying dividends. In other words, the company must have an identifiable core business. And to be listed, the core business must be able to satisfy the listing requirements of the exchange. If this is the business model, then the evaluation and valuation will be done on the fundamental of the company in the same manner as all the other companies operating in the same industry, which in this case the oil and gas industry with the likes of Yinson, SapuraKencana, UMWO&G, Bumi Armada and others.
So, where do I put Hibiscus as? As a private equity or a normal operating company? The only way I can objectively put my mind at ease is to look at the equity guidelines of the Securities Commission Malaysia to see if Hibiscus would have made it as it is to the exchange.
Under 'Profit Test' an applicant needs to have a core business, defined as "the business which provides the principal source of operating revenue or after-tax profit to a corporation and which comprises the principal activities of the corporation and its subsidiary companies". Well, assuming we take the QA of Hibiscus as the 'core business', it may have passed this test if it provided the principal source of revenue and profit for Hibiscus. But that is only because Hibiscus bought and now owns 35% stake in Lime, which allowed for equity accounting. It does not come across as a typical core business in a normal IPO where ususally we would see the listing company owning 100% of the core business via direct ownership of the assets and operation or the operating company. Well, if not 100%, then a majority control is more familiar to us. In other words, no matter how big Lime grows into, the stake is only 35% (Lets not get into the RM20 million requirement and track record.)
Why is the majority control of core business is important to me? It is because if i were to treat the company as a perpetuity, I must have the comfort that it can determine the perpetuity itself, independently and without any hindrance. If I were to own less than 50% of a company, I have a much restricted rights and say on this matter. I am a minority shareholder. I mean if we were to put, size aside, the control over the core contributor of profit between Hibiscus and SapuraKencana, UMWOG or Yinson, we would able able to see the difference there.
Is it wrong? NO. Remember, the purpose i made this comparison is just to put the business model in the proper perspective according to my views. I do this so that I can try to make sense of the valuation and pricing of the shares of Hibiscus. The 35% stake in Lime has some value, and in some cases it could be more valuable than 100% of other company.
However, lets assume all is good and lets take one common valuation indicator, the PE ratio. Based on the following, the PE for 2013 was 66.80 times! Really? That is way higher than SapuraKencana or even UMWOG, let alone the industry average of approximately 13 times.
Stock Price : 1.75 (2013-12-31)
EPS : 2.62
P/E Ratio: 66.80
How else could I make sense of all this? Well, another possible way for me to look at the price is to assume a different business model for the company.
A private equity model usually values the 'assets' on piecemeal basis. They are valued based on the a view to exit. From there, we would be able to arrive at the value of the private equity fund by adding on all the pieces of investments together. Interestingly enough, I stumbled upon a research report by a local institution that did exactly just that for Hibiscus: valuation based on the sum of parts. And the stock price of RM1.75 was within their range of estimated worth of the company.
Well, what is the takeaway here? Well, in my opinion, price is different from the value, as I have discussed previously. The demand for shares depends on the expectations of profits to be made from the movements of the shares and expectations are a function of how the investors view the company.
If I had assumed that a SPAC post acquisition is a typical oil and gas company, I would have been baffled as to why the demand was so high compared to the fundamental of the company. However, it feels that the price makes more sense when I view the company as still a private equity venture: something that carries a high potential (hence expectations) together with an equally high amount of risk.
REMINDER/ DISCLAIMER: THIS IS NOT A RECOMMENDATION TO BUY OR SELL HIBISCUS OR ANY SPAC OR ANY SHARES. IT IS INTENDED TO EDUCATIONAL AND DISCUSSION PURPOSE WITH A VIEW TO PROMOTE MORE ANALYTICAL INVESTING AND LESS GAMBLING.
Sunday, July 6, 2014
Share price: demand, supply and expectation
The price of a share is indeed an interesting item. It had brought joy to many and brought tears to just as many (if not more) investors.
Why is it interesting? To me it is interesting because the 'behaviour' of the price is unique. While it uses the same platform of demand, supply and price equilibrium mechanics of a commodity (sugar, rice, coffee etc), the characteristics could not be more different.
Understanding the characteristics and behavior of the share price is so important that it would either place the investors as a clairvoyant, a gambler or a buffoon.
Share price is the equilibrium price at any point of time when a buyer and seller agreed to buy and sell an amount of shares.
The above would immediately make us think of the supply and demand curves that determine the prices of commodities like sugar and rice. The price of commodities are also determined by the the intersection between the supply and demand curves. A typical demand and supply curves of a commodity would like an 'X' where the demand is higher as the price gets lower (indicating people will consume more) and the supply gets higher as the price gets higher (indicating people will produce and sell more).
But then there is a major difference between the commodity and share. Commodities are purchased to be consumed, shares are purchased to be sold back again (let's ignore dividend for the time being). You cannot chew on the share certificates or even bring it to the neighborhood grocer to buy fish (unless he trades in shares too). Generally, it has to be sold and converted into cash at the end of the day. Therefore, shares are bought with the EXPECTATION to make profit by selling the shares.
Therefore, in my opinion, the demand curve for shares are not driven by actual price but rather expectation of profit or future price. Therefore, that would explain why sometimes, as the price of the share increases, the more demand it seemed to attract. Until at one point when the expectation of further profit is nil, then the demand starts to fall.
Same with the supply side, instead of the supply being driven by the price of the shares, it is actually being driven by the expectation of future price and profit (or losses). If the expectation of the profit increases, the supply would be less as people would hang on to the shares to expect more profit.
However, we have to remember that on the supply side, there is another important factor which is realization of profit, i.e converting cash into shares or cashing in on the opportunity. This is sometimes, especially for institutional investors, may be insensitive to price or expectation as they would be set at an arbitrary figure for example 'sell when share price makes 30% gain for example". While the demand side may have this rule, it is less prevalent.
The effect of expectations on share price, in my opinion, explains a lot of things.
It explains the frustrations of investors trading on fundamental analysis and valuation as to why sometimes despite the wonderful fundamental results, the share price does not budge, or worse drops. In my book, that is because it failed to increase expectations.
Expectations are a function of the number of investors and their expectation level.
If the shares are not known to many investors, in other words they are below the radar, then any fundamental result would have a minimal effect on the shares simply because there are not going to be many investor affected by it. That is why research reports and newspaper highlights are crucial. That is why investor relationship are vital for any publicly listed company.
If we have discovered a gem of a share based on our own fundamental analysis, no matter how accurate our calculations were, it would mean nothing if our expectations are not shared by others. Not that we are wrong or anything, it is simply that other are not aware (or worse not interested or not in their mandate).
Similarly, if we were to conduct a technical analysis of a certain share, we might seem to believe that the share had turned a corner and is expected to rise. But again, if this is not known to others the price would not budge until a significant number starts to see the same thing and have the same expectations. And since the trend of a technical chart is built upon the actual historical prices of the share itself (sort of a self fulfilling prophecy), the absence of a large number of people believing in the prophecy would then render it unfulfilled.
But this does not mean fundamental analysis or technical analysis is not important, just that we have to remember that a correct analysis does not guarantee you a profit in the stock market. It simply gives you a chance at making a profit when everyone else catches up with your findings AND you have enough staying power to wait when they do.
Why is it interesting? To me it is interesting because the 'behaviour' of the price is unique. While it uses the same platform of demand, supply and price equilibrium mechanics of a commodity (sugar, rice, coffee etc), the characteristics could not be more different.
Understanding the characteristics and behavior of the share price is so important that it would either place the investors as a clairvoyant, a gambler or a buffoon.
Share price is the equilibrium price at any point of time when a buyer and seller agreed to buy and sell an amount of shares.
The above would immediately make us think of the supply and demand curves that determine the prices of commodities like sugar and rice. The price of commodities are also determined by the the intersection between the supply and demand curves. A typical demand and supply curves of a commodity would like an 'X' where the demand is higher as the price gets lower (indicating people will consume more) and the supply gets higher as the price gets higher (indicating people will produce and sell more).
But then there is a major difference between the commodity and share. Commodities are purchased to be consumed, shares are purchased to be sold back again (let's ignore dividend for the time being). You cannot chew on the share certificates or even bring it to the neighborhood grocer to buy fish (unless he trades in shares too). Generally, it has to be sold and converted into cash at the end of the day. Therefore, shares are bought with the EXPECTATION to make profit by selling the shares.
Therefore, in my opinion, the demand curve for shares are not driven by actual price but rather expectation of profit or future price. Therefore, that would explain why sometimes, as the price of the share increases, the more demand it seemed to attract. Until at one point when the expectation of further profit is nil, then the demand starts to fall.
Same with the supply side, instead of the supply being driven by the price of the shares, it is actually being driven by the expectation of future price and profit (or losses). If the expectation of the profit increases, the supply would be less as people would hang on to the shares to expect more profit.
However, we have to remember that on the supply side, there is another important factor which is realization of profit, i.e converting cash into shares or cashing in on the opportunity. This is sometimes, especially for institutional investors, may be insensitive to price or expectation as they would be set at an arbitrary figure for example 'sell when share price makes 30% gain for example". While the demand side may have this rule, it is less prevalent.
The effect of expectations on share price, in my opinion, explains a lot of things.
It explains the frustrations of investors trading on fundamental analysis and valuation as to why sometimes despite the wonderful fundamental results, the share price does not budge, or worse drops. In my book, that is because it failed to increase expectations.
Expectations are a function of the number of investors and their expectation level.
If the shares are not known to many investors, in other words they are below the radar, then any fundamental result would have a minimal effect on the shares simply because there are not going to be many investor affected by it. That is why research reports and newspaper highlights are crucial. That is why investor relationship are vital for any publicly listed company.
If we have discovered a gem of a share based on our own fundamental analysis, no matter how accurate our calculations were, it would mean nothing if our expectations are not shared by others. Not that we are wrong or anything, it is simply that other are not aware (or worse not interested or not in their mandate).
Similarly, if we were to conduct a technical analysis of a certain share, we might seem to believe that the share had turned a corner and is expected to rise. But again, if this is not known to others the price would not budge until a significant number starts to see the same thing and have the same expectations. And since the trend of a technical chart is built upon the actual historical prices of the share itself (sort of a self fulfilling prophecy), the absence of a large number of people believing in the prophecy would then render it unfulfilled.
But this does not mean fundamental analysis or technical analysis is not important, just that we have to remember that a correct analysis does not guarantee you a profit in the stock market. It simply gives you a chance at making a profit when everyone else catches up with your findings AND you have enough staying power to wait when they do.
Tuesday, January 14, 2014
Mergers and Acqusition: the strategy of thriving
I have always considered and treat business as a living thing. It breaths, heaving up and down; it eats, consuming resources and energy; it craps, leaving a trail of social cost and waste; it grows, both in terms of size and age; it gets sick, throwing up employees as they get sacked; and it dies, either liquidated or consumed by a larger business. Business is also made up of people, organisms that works and operates in a system, not unlike us humans where we are a combination of organisms, organs and elements that operates in a systematic manner. Imagine if suddenly the system gets haywire (like your heart decides not to play its role and pump the blood), we would be in trouble indeed. So yeah, I see business as a living being.
And it is a living being that lives in competitive community, hostile most of the time. There are laws and regulations to help put order in place, but that is not necessarily the case all the time. It is a a dog eats dog world where the rule of the jungle applies, where the strongest and smartest (you would need to have both) survives.
As a living thing living in a hostile environment, a business or firm needs to do just that, be the fastest, biggest and smartest to stave of the sharks and other predators. In order to do that, the firm needs to evolve or grow bigger through whatever means possible.
Take the financial sector in Malaysia for example, after the financial crisis in 1998, the government realised that having many small banks leaves the domestic banking sectors and banks susceptible to the much larger foreign banks like Citibank, Stanchart and the likes. BNM then forced the banks to merge so that they could have a larger balance sheet and to compete even in the domestic market. The result is what we see now, with CIMB, Maybank, RHB possessing the size and might to take on mega deals which previously would have gone to foreign advisers. Maybank could swallow Felda Global Ventures listing and CIMB financed billions of ringgit worth of investments.
Their growth in size has also allowed them to not only stave of hostile competitors, but made themselves a predator, buying up banks in the region. CIMB has been acquiring banks in the region and so does Maybank. That had enabled the two banks to expand their reach and secure more business. They would not have been able to do what they are doing now if they had not taken that leap of exponential growth post the 1998 financial crisis.
But growing simply for the sake of growing is also wrong. It could lead to obesity, where the firm is not the biggest and fastest, but the fattest which makes a delicious meal to a hungry competitor.
There is a vast difference between biggest and fattest, especially in the business world. A bloated firm could get sick very fast and then susceptible to a target which could be much smaller than it is. This is the single most important principle that drove and caused the privatization of government 'businesses'. Take for example some utility business like the water business. It is a lucrative business, a cash cow, but it grew so fat that it became a target for private individual to take-over where the latter came with the promise of improved efficiency and profitability for all. Therefore, the business cannot simply just eat eat eat. It has to have a plan.
Mergers and Acquisition (M&A) is a part of business. It is one of the weapons within the arsenal of firm. But this weapon is not cheap and must be handled with extreme care. It could blow up in the face, backfired, as happened to many companies before. M&A is a resource and energy intensive exercise and if not careful, sap away all the resources of the firm even to carry on its normal course of business. M&A is an intoxication activity, it is sexy and could be sucking away attention of the top management away from the normal course of business. The worst is that the manager got sucked in so far inside that he or she would push for the completion of the M&A just for the sake of completing it, just because "we have come this far". This cloud on judgement have killed many businesses so be careful. On this note, a fine example of a master practitioner in M&A not getting sucked into this is Tan Sri Khalid of Kumpulan Darul Ehsan Berhad in their quest to take over the water assets in Selangor. After years of negotiation the M&A, and despite all the effort and energy that they had put into it, he was willing to end negotiation when the M&A does not or no longer plays like how he wants it to be be. He killed it (but there is more to this here) and was willing to walk away, for now.
Therefore, there must be a system before you deploy the M&A 'bomb'. There are many cliches that people use to justify M&A, like "eat or be eaten" or " bigger is better", "the best defense is an offense" or even "synergy", but without a proper business strategy system, methodology and process, an M&A could very well be set to self-destruct.
The following is the general process of implementing a business strategy that involves M&A.
We will continue this in our next posting. Please subscribe or 'follow' this blog so that you will be kept updated. This post is part of the M&A series which is linked to the Corporate Finance training conducted by Symphony Digest titled Applied Mergers and Acquisition. The details of this very affordable and useful training is provided below. Great hand-on and interactive session for business owners, mangers, corporate finance practitioners, journalists and you! Click on the link here to sign up - hurry, limited seats :-)
And it is a living being that lives in competitive community, hostile most of the time. There are laws and regulations to help put order in place, but that is not necessarily the case all the time. It is a a dog eats dog world where the rule of the jungle applies, where the strongest and smartest (you would need to have both) survives.
As a living thing living in a hostile environment, a business or firm needs to do just that, be the fastest, biggest and smartest to stave of the sharks and other predators. In order to do that, the firm needs to evolve or grow bigger through whatever means possible.
Take the financial sector in Malaysia for example, after the financial crisis in 1998, the government realised that having many small banks leaves the domestic banking sectors and banks susceptible to the much larger foreign banks like Citibank, Stanchart and the likes. BNM then forced the banks to merge so that they could have a larger balance sheet and to compete even in the domestic market. The result is what we see now, with CIMB, Maybank, RHB possessing the size and might to take on mega deals which previously would have gone to foreign advisers. Maybank could swallow Felda Global Ventures listing and CIMB financed billions of ringgit worth of investments.
Their growth in size has also allowed them to not only stave of hostile competitors, but made themselves a predator, buying up banks in the region. CIMB has been acquiring banks in the region and so does Maybank. That had enabled the two banks to expand their reach and secure more business. They would not have been able to do what they are doing now if they had not taken that leap of exponential growth post the 1998 financial crisis.
But growing simply for the sake of growing is also wrong. It could lead to obesity, where the firm is not the biggest and fastest, but the fattest which makes a delicious meal to a hungry competitor.
There is a vast difference between biggest and fattest, especially in the business world. A bloated firm could get sick very fast and then susceptible to a target which could be much smaller than it is. This is the single most important principle that drove and caused the privatization of government 'businesses'. Take for example some utility business like the water business. It is a lucrative business, a cash cow, but it grew so fat that it became a target for private individual to take-over where the latter came with the promise of improved efficiency and profitability for all. Therefore, the business cannot simply just eat eat eat. It has to have a plan.
Mergers and Acquisition (M&A) is a part of business. It is one of the weapons within the arsenal of firm. But this weapon is not cheap and must be handled with extreme care. It could blow up in the face, backfired, as happened to many companies before. M&A is a resource and energy intensive exercise and if not careful, sap away all the resources of the firm even to carry on its normal course of business. M&A is an intoxication activity, it is sexy and could be sucking away attention of the top management away from the normal course of business. The worst is that the manager got sucked in so far inside that he or she would push for the completion of the M&A just for the sake of completing it, just because "we have come this far". This cloud on judgement have killed many businesses so be careful. On this note, a fine example of a master practitioner in M&A not getting sucked into this is Tan Sri Khalid of Kumpulan Darul Ehsan Berhad in their quest to take over the water assets in Selangor. After years of negotiation the M&A, and despite all the effort and energy that they had put into it, he was willing to end negotiation when the M&A does not or no longer plays like how he wants it to be be. He killed it (but there is more to this here) and was willing to walk away, for now.
Therefore, there must be a system before you deploy the M&A 'bomb'. There are many cliches that people use to justify M&A, like "eat or be eaten" or " bigger is better", "the best defense is an offense" or even "synergy", but without a proper business strategy system, methodology and process, an M&A could very well be set to self-destruct.
The following is the general process of implementing a business strategy that involves M&A.
We will continue this in our next posting. Please subscribe or 'follow' this blog so that you will be kept updated. This post is part of the M&A series which is linked to the Corporate Finance training conducted by Symphony Digest titled Applied Mergers and Acquisition. The details of this very affordable and useful training is provided below. Great hand-on and interactive session for business owners, mangers, corporate finance practitioners, journalists and you! Click on the link here to sign up - hurry, limited seats :-)
Thursday, October 10, 2013
Making sense thru corporate finance
In business, big or small, it will all boils down to this...
That is the stage and there is the plot...if you cannot find where you are then you are in trouble...
For more information, leave a comment, otherwise you can be at our workshop on Corporate Finance, happening on 26 October 2013. More info at this link here.
That is the stage and there is the plot...if you cannot find where you are then you are in trouble...
For more information, leave a comment, otherwise you can be at our workshop on Corporate Finance, happening on 26 October 2013. More info at this link here.
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