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:

1. "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?
2. Synergy is elusive to calculate, even more elusive to realise. Bigger simply means just that, bigger. Bigger headache.
3. What to expect in the coming months, negotiations, announcements and motivations

At the time of writing, I have no position in any of the three counters.

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 beast entity.

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.

SPAC IPOs of O&G, unravelling the acronyms, so to speak.

THE WRITINGS BELOW ARE FOR EDUCATIONAL DISCUSSIONS ONLY. IT IS NOT AN ADVICE TO BUY OR SELL ANY SHARES OR SECURITIES

Special purpose acquisition company, or SPAC is the talk of the financial town. Its the thing that you need to know if you are in the financial market. Its kinda like pop culture at the moment. Here are some of the points that may be of interest to you.

What is a SPAC?

In my book it is like a private equity investment model made available to the public. Private equity investment is where people pool their money together with the intention of investing in businesses that will generate profit and cash flow back to the shareholders. The main difference between SPAC and a conventional private equity model is that in a conventional private equity model, the fund is held private; meaning it is not offered to the public and it is not publicly traded. SPAC, through an IPO makes its shares available to the public, and by having the company listed on an exchange like Bursa Malaysia makes it possible to trade the shares over the exchange.

In a nutshell, although the liquidity of shares are different, the business model is still the same. As an acquisition company (which is similar to a private equity fund), the company makes its money by making SUCCESSFUL acquisitions. Unsuccessful acquisition should technically destroys value (which we would understand once we see how value and price are different animals.

If SPAC is so risky why did the regulators allow the listing?

I don't know.

But if I were to hazard a guess it would be because the regulators want to make the market more attractive to the local and international investing community by having more products on the market. A stock market is not unlike a wet market, the more products there are in the market, more people will come and buy things. We can see the regulators in the recent past introduced Closed Ended Funds, REIT (somewhat successful now), Exchange Traded Funds (lukewarm), Exchange Traded Bonds (almost cold), Business Trust (huh really?) and now SPAC.

Whether this is good or bad for the market is subjective and only time will tell. There has been talks that the SPAC market in the US has fizzled down and that other more developed market not even allowing SPAC listing on their market due to its risky nature but I think this time I agree with the regulators. In developing the market you got to take chances and SPAC is kinda a calculated risk. In development, you are going to end up either a hero or a zero, but that is better than not doing anything.

Are the investors paying too much for the SPAC?

Everything has a price and the key principle to investing is to get back more than what you paid for the investment. In the case of SPAC, the investing public paid the IPO price to get the investment. Collectively, the public paid RM235 million for approximately 74% stake in Hibiscus Petroleum, RM364 million for roughly 75% stake in CLIQ Enengy and RM550 million for roughly 77% stake in Sona Petroleum.

The rest of the respective stake in the companies are owned by the management and pre-ipo investors and this is how much they are worth (approximately) at ipo: Hibiscus (RM78 million), CLIQ (RM109 million) and Sona (RM155 million). Since there are no assets in the company except the expertise of the management, I would look at it as this being the value of the management (mostly) and their aim to generate return by making successful acquisition(s) in the oil and gas industry.

Someone was quick to point out that these are only on paper and they cannot sell the shares. True. But then you need to remember that the company does not have to return back the 10% of funds raised from the IPO and up until recently when the regulators changed the guidelines, that amount could be used to pay the salaries of the management. With regards to the 3 SPAC above, the approximate numbers are RM23 million for Hibiscus, RM36 million for CLIQ and RM55 million for Sona, CASH. Not a bad return for all the cost and expenses in setting up the SPAC and going through the IPO.

Anyway, back to the investors. Based on my opinion that this is a private equity in nature, what kind of return would I expect? This is important as it would determine the price I would be willing to pay and the quality of the qualifying investments later.

For me as an investor, I would expect at least a 30% return on my investment in a risky private equity venture. If normal equity investment in a running business, the high teens should be acceptable but the risk in SPAC is way higher, so I personally would put 30% as the expected hurdle rate. We all have different views and risk tolerance so you got to find your own. But what does 30% means. It means that I would get 30% return (profit) on my investment each year. If I invested RM1 ringgit, I want 30 sen profit back every year.

Too much? Well, that is when the concept of opportunity cost come into play because if it is not going to give me 30 sen return, I could use the same RM1.00 to get a profit of say 18  sen from a company which is already running and has a track record.

So, is the hundreds of millions for approximately 75% stake in the company, was it a fair price? At the point of listing, nobody knows. It will depend on the belief of the investors of what would be the management's capability to generate the returns, the profits. For the purpose of illustration, if you (the public shareholders) had paid RM100 million for 75% of the company, the entire company would assume a value of RM133 million. 30% profit from RM133 million would be RM39 million. This would give you a PER of 3.4 times, crudely.

What would be my floor? Well in order to find the minimum level of expected profits, I would have to look at the average earnings of the other oil and gas companies. Lets assume the PER is 18 times. That means the price is 18 times of the expected earnings and if the price is RM133 million, then the expected annual earnings should be just over RM7 million per annum.

In any case, the above is based on RM100 million arbitrary figure, so the expected amount of profits will be proportionately higher the more money you collected from the public (for the same percentage of ownership).

Therefore SPAC is a great vehicle for those who understands the risks and expectations. It is a sheer gamble if you don't.

However, the value and expected return that were mentioned above are related to the intrinsic value of the business, not the price. I always hold the belief that the value and price of a business in not the same, and SPAC is the epitome of this concept. And this is most prevalent in a publicly traded company.

In an publicly traded SPAC, when the public shareholders invest they would hold tradable shares (we will talk about warrants later). The price of this shares is at the mercy of the supply and demand of the shares and valuations (PE, DCF etc) merely serve as a reference point relative to the price. The price of the shares include expectations, greed, risk aversion, liquidity, mandate, excess cash and other external factors, all rolled into one transacted price. In the case of SPAC then, even if there is no assets or profits being generated by the company, changes in expectation, greed level or risk aversions of the investors at large would have an impact on the prices the shares of the SPACs. If it goes up more than the IPO price, then the shareholders would make a positive return on its investment, if the price went down, then they would have made a capital loss. This is more pertinent to short term investors who has short holding period. They would be looking at the capital gain as a measure of return as opposed to the increase in the intrinsic value of the SPAC.

In a nutshell, short term investors in SPAC would need to bank on the increasing demand for SPAC shares to have the chance to make the return.For the long term investors, in addition to the demand for the shares, they would also need to take into consideration qualifying acquisition when it happens. This is important because once a qualifying acquisition takes place, the SPAC is no longer a SPAC; it then becomes an oil and gas company where the reference point now exists. As the profits and assets adds to the perspective of long term return, the price might adjust itself upwards or downwards accordingly.

It is also important when looking at a qualifying acquisition to ascertain the ability of the SPAC to realise the return of its investments in qualifying acquisitions. Some SPAC takes just enough equity interest to equity account the profit of the qualifying acqusition  by in reality, have limited ability to realise that investment within SPAC itself at it does not have access to the cashflow of the company. In such case, it would be dependent on the dividend up-flow to the SPAC only. Therefore, take a bit more time to understand the weight of the 'profit' of a SPAC whenever you are presented with one.

Are the management and Pre-IPO shareholders getting too much from SPAC?

The answer to this question is that only time will tell as it would depend on the success of the qualifying acquisitions.

Why does SPAC issue warrants?

Warrant is an instrument of chance and probability. It is a derivative where the return on the warrants depends on the price of the shares (in this case shares of SPAC) rather than the intrinsic value of the company (directly). As we have discussed earlier, price and value are two different things and hence the price of share depends, significantly, over the demand and hype of the shares rather than just the valuation of the shares.

Warrants are also an instrument of volatility where the more volatile the underlying shares (of the SPAC), the more valuable would the warrant be.  In addition to that the longer the duration of the warrants, the more valuable the warrant is.

Therefore, a warrant over a SPAC seemed like a perfect fit as SPAC, in the early days are almost purely speculative and is expected to be volatile. Offering free warrants to the subscribers of the IPO is in a way akin to giving a discount on the cost of subscribing for the shares. Hence if you were to say, forked out RM0.50 sen for one share and a warrant, your cost for the shares would reduce if you are able to sell your warrants for say 15 sen.

But why would there be a demand for warrants for SPAC? One of the reason could be that  some people might find SPAC to be a very risky investment but they do not want to miss the boat if the SPAC managed to be a success. Well, warrants would just be a cheaper way to gain an indirect exposure to the price appreciation of  the SPAC.

Well, these are some of the things that we have discussed about SPAC. If you have any question, please feel free to post them on the comments section below.

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 :-)

Merger and Acquisition: The Brilliant Water deal

Today, on 10 January 2014, the long drawn water acquisition battle made a surprise turn. Kumpulan Darul Ehsan Berhad (KDEB) told the target companies, Punchak Niaga and Syabas, that they will be no further negotiations on the deal in the foreseeable future. The newspapers came out with two stories:

The Sun:  
PETALING JAYA (Jan 10, 2013): Shares of both Selangor water concessionaire holders Gamuda Bhd and Puncak Niaga Holdings Bhd were at odds yesterday on the Selangor state government's decision to throw in the towel on plans to take over the water assets in the state.

The Star:
Water concessionaires in Selangor, including Puncak Niaga Holdings Bhd and Gamuda Bhd, may be forced to accept Kumpulan Darul Ehsan Bhd’s (KDEB) offer to acquire their water assets in the state, following the Government’s decision to invoke Section 114 of the Water Services Industry Act 2006 (WASIA).

So, which one is right?

This is a classic mergers and acquisition exercise carried out by one of the very best in the field, Tan Sri Khalid and the following are why I think so:

1. Tan Sri Khalid is very clear about the principle of mergers and acquisition: maximizing value to KDEB. Tan Sri Khalid is on the side of KDEB, so he needs to get the best value for KDEB and in this case, getting the lowest cost possible. He is not consumed by the fact that he needs to complete the deal at whatever cost.

2. Acquisiton is about endurance. The one that can last the longest wins. Tan Sri made his offer many many years ago. Has he spent any significant amount? I don't think so. Has the acquiree spend anything - yes. Punchak Niaga and Syabas would have been making plans and taking on commitments (in terms of business and new ventures) on the possible cash windfall. Bankers may have been lining them up with cheap and easy loans in anticipation of the cash from the water sale. Now that there is no money coming in as expected, guess who is under pressure now?

3. Tan Sri set aside ego - the number one killer in M&A. More than 70% of the market-based takeover results in the acquirer losing value in the end. Mostly due to the rush to complete the deal and hubris (ego). Tan Sri did not cave in to the pressure not ego. He willingly 'walked away' from the table (but he is really not).

4. Take-overs is about using/leveraging external force to your advantage. The only internal power an acquirer has is money and if the acquiree sense that, the target company will milk that 'power' of money to the max. Tan Sri, while seeming to 'walk away', instead will be using the power of the law and federal government to make things happen; and that is free - no legal fees involved. The government will pay for all the paperwork and legal actions to invoke section 114.

5. Acquisition is about valuation, a fair valuation. By riding on section 114 together with the federal government, KDEB is resting the burden of finding a fair value at the hands of the federal government. And since the valuation is going to be done together with the water assets that the federal government wants to acquire, Tan Sri would also be able to know the valuation of the acquisitions by the federal government and in a way 'scrutinies' or disclose any massive over-valuation . Their last offer was RM9.65 billion for the Selangor water assets and if going by the federal government's valuation of other water asset acquisition would cause a significantly higher amount, Tan Sri would be able to use that to discredit the federal government ability in getting a good value for its acquisition. Therefore, for political reasons, the federal government may also be limited in their valuation of the water acquisitions.

6. M&A is about who can get it done.  Water is a monopolistic asset. As such, it would be difficult to find an agreeable price and it would take the the might of the government to get it done. By stapling the Selangor's water deal to that of the federal government, KDEB's chance of getting the deal done is almost as high as that of the Federal Government. The government has to approve both or none.

In summary, I think Tan Sri was brilliant to call their bluff, that he made the acquiree wait and seem to get greedy and wait some more, the acquirees start making commitment and then KDEB pull the rug under their table. That was his run and now he has a chance to rest as Tan Sri has passed the 'baton' to the federal government. The target companies? Well the race has not ended yet as they now have to run with the federal government while now having to 'turn the tap' back on as they can no longer blame any water woes on the Selangor government.

Brilliant, simply brilliant.

Making strategic decisions

Every business, big or small, would have a strategy (or more). I found the following strategy action tree very helpful in trying to make sense of the decisions that needed to be made or making sense of decision made by others.

Hope it helps you too. If you have any question, please feel free to post it in the comment box. I will get back to you as soon as possible.

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Yazdi occasionally holds and runs corporate finance workshops, where you could gather the financial sense required to succeed in business or at your workplace. His past participants included senior managements (including a CEO or two) and executives of financial industry (including fund managers, analysts) as well is business practitioners.

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