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To control or not to be controlled19/10/2005. Source: Asia Private Equity Review. 
For Asian buy-out investors, taking 'control' has not only breathed life into ailing companies, but it has yielded tremendous returns. The divestment results in the first half of 2005 are a testimony of the bountiful private equity harvest - but there are hurdles, says APER. Two buyout cases fell through within weeks apart of each other, underscoring hurdles for buyout investors
In its short history in Asia, the merit of the buyout model has quickly gained recognition. In South Korea, foreign-led buyouts scored early success. Its domestic enterprises experienced the stunning capability of buyouts that reverse the nation's economic woes at the end of last decade.
The successful turnarounds of Good Morning Securities (previously known as Ssangyong Securities), KorAm Bank and Korea First Bank were powerful factors that drove Seoul to promote buyout culture in its local private equity community. Since then, Japan, has become Asia's largest buyout market, with Shinsei Bank, once crumbling under mounting debt and later becoming Asia's buyout masterpiece.
For Asian buyout investors, taking "control" has not only breathed life into ailing companies, but it has yielded tremendous returns. The divestment results in the first half of 2005 is a testimony of the bountiful harvest. In the first six months of the year, over US$13.5 billion has been realised through 60 divestment results. Out of this sum, 71% came from those that can be classified as "control" deals.
It was once an alien concept for shareholders of Asian companies to cede control of their business to foreign institutions, but Asian Inc.'s shareholders, including governments and private investors are warming up to this novel concept. But two recent incidents, one in Taiwan and another in Thailand, characterise the formidable barriers still confronting buyout investors in the Asian business landscape.
Storm Over Island
The Taiwan banking sector is an attractive candidate for foreign buyout investors. Its combined assets, estimated at US$750 billion is one of the largest in Asia. So far, the island's banking industry has yet to produce a major regional competitor. Largely controlled by the government, Taiwan's banking industry is not only overcrowded but also very fragmented. The government claims title to over 50% to 60% of the island's banking assets.
There are 48 banks in Taiwan and none of them has a market share of more than 10%, so none of them can operate as a major player, both in the island as well as in the region. President Chen Shiu-bian's government is eager to introduce foreign and local investors to speed up the island's financial consolidation. In May this year, Taiwan's Financial Supervisory Commission revised the island's rules that would allow foreign financial companies to take full ownership of domestic banks. After having sold a 20% equity stake of Changhwa Commercial Bank ('Changhwa Bank') to the local Taishin Financial Holdings, the Taiwan government moved to privatise its holdings in Taiwan Business Bank, the island's ninth largest bank by assets. Compared with its peers in both Hong Kong and Singapore, Taiwan Business Bank trails far behind Hong Kong's Hang Seng Bank and Singapore's DBS Bank.
The invitation began in late July. Unlike Changhwa Bank which attracted bids from foreign investors, including Japan's Shinsei Bank and The Carlyle Group, the government's sale of its 43% holdings in Taiwan Business Bank attracted the expression of interest from three local financial groups, including E. Sun Financial Holding Co., Mega Financial Holding Co. and Fubon Financial Holding.
In mid September, the sale of Taiwan Business Bank was fast becoming a fading ambition for the Ministry of Finance. About half of the bank's 4900 employees voiced deep opposition to the sale through a strike while its union demanded better benefits for its members. The ministry then acknowledged the frustrated sale, citing a low bid price as the prime reason. Ten days later, Taiwan Business Bank's chairman resigned, casting doubt over the lender's ability to introduce changes to its boardroom.
Fleeting Defeat
While the Taiwan government reconciled with another set back in advancing the merits of ceding control of its assets to third party investors, a high profile takeover attempt was also rejected in Thailand. The Thai music giant GMM Media Public Company Limited ('GMM Media'), was rejected when it tried to seek control over Matichon Public Company Limited ('Matichon'), one of Thailand's most respected newspapers.
Until recently, GMM Media was a 0.05% shareholder in Matichon. In September, it raised its stake in Matichon to 32.23% in deploying an approximate 732 million baht (US$17.8 million) to acquire over 65.9 million shares, representing a price of 11.10 baht per share, just below the 11.20 baht closing price per share the day when GMM Media announced its intention to launch a takeover bid for Matichon.
According the rules of the Securities & Exchange Commission of Thailand, GMM Media would be required to conduct a tender offer at the price of Baht 11.10 per share to all other holders of Matichon ordinary shares. GMM Media met its fate before it had the opportunity to proceed with a general offer to all other shareholders in Matichon. The publishing company's managers rejected the unsolicited takeover gesture and vowed to launch a counter offer for the company's shares.
GMM Media's primary motive to take full control of Matichon was being questioned. As subsidiary of GMM Grammy, owned by Mr Paiboon Damrongchaitham, a close friend of the Prime Minister Thaksin Shinawatra, the public viewed the deal as a buyout from the Prime Minister. Under the control of GMM Media, Matichon's independent position would have to be compromised. Protesters threatened to boycott GMM Grammy's CDs and videos, which are Grammy's core revenue.
Against the backdrop of mounting disapproval from the public and Matichon's management, three days after GMM Media made known of its ambition to broaden its empire in taking full control of Matichon, it hurriedly retired from the bidding scene. It reduced its holdings in Matichon from 32.23% to 20% by selling shares back to Matichon's chairman and founder, Mr Khanchai Boonpan, at the same price that GMM Media itself had earlier paid for the stock. But GMM Media did not suffer the same setback in becoming the second major shareholder of Post Publishing Public Company Limited (POST). It took up a 23.26% shareholding in POST, a percentage that is under the mandatory tender offer threshold.
Observation
Despite buyout investors' resounding success in Asia during its short history, there are formidable hurdles. The case studies on Taiwan Business Bank and Matichon highlight the powerful resistance from vested parties when their interests are under threat. The workers of Hanaro Telecom, South Korea's largest telephone company, backed by both Newbridge Capital and American International Group, threatened to stage a strike in response to management's plan to cut jobs.
Takeover targets that are closely associated with government policy often present numerous challenges. Added to these is the high concentration of single majority shareholders in Asian businesses. Over 90% of the listed companies in Hong Kong, one of the most internationalised markets in Asia, is dominated directly or indirectly by one shareholder, in the form of either family or government.
But the determined are unlikely to be deterred. On the heels of Taiwan Business Bank's failure to secure an immediate investor, the Taiwan government invited bids for a majority stake in the island's largest shipbuilding company, China Shipbuilding Corp. As long as there are commitments, buyouts in Asia will bloom.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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