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International -- Asian Cover Story
ASIA'S AGE OF THE DEAL (int'l edition)
As Asia's debt crisis bites, old barriers to cross-border mergers are crumbling
Asia had never been a priority for Prince Alwaleed bin Talal, the Saudi whose $11 billion net worth makes him one of the world's most powerful investors. Although he looked at dozens of situations in Japan, Korea, and elsewhere, he always came away with the same judgment: "Valuations were just too high. It was crazy."
That was then. Now, when the Prince jets across Asia in his Boeing 727, he finds plenty of bargains. Since December, he has bought stakes in Malaysian Telekom, Malaysian carmaker Proton, South Korea's Daewoo Corp., and Singapore property group HPL. But he is hardly shopped out. "When Asia comes back--and it will--it's going to be even stronger than it was before this crisis," predicts Alwaleed.
VULTURE FUNDS. Let the dealmaking begin. As Asia's debt crisis takes a growing toll on cash-strapped companies and governments, deep-rooted barriers to cross-border mergers and acquisitions are starting to crumble--from Tokyo to Seoul to Jakarta. Foreign buyers, from opportunistic vulture funds to huge multinationals seeking strategic footholds, are scouring the region. Many, such as Merrill Lynch & Co. and Coca Cola Co., find that assets they've coveted for years are suddenly for sale.
So far, the sums involved are small by Western standards. The estimated $52 billion in deals done in all of East Asia last year, according to the magazine M&A Asia, accounted for about 3% of deals worldwide--and not much more than the $42 billion that WorldCom Inc. alone offered for MCI Communications Corp. But the amount is expected to balloon. Each month, thousands of companies join the ranks of the insolvent. And as even elite business groups grow desperate, powerful overseas-Chinese families and proud Korean chaebol that diversified wildly during East Asia's go-go decade are overcoming the notion that selling a business is an unbearable humiliation. South Korea's Samsung, Indonesia's Salim, and Thailand's Charoen Pokphand are among the groups now shopping around the hotels, chemical plants, and finance firms that they once treated as crown jewels. "For years, everything these groups touched turned to gold," says Hong Kong merchant banker Tony Miller. "Now, that gold is turning to dross."
The shakeout is likely to reshape Corporate Asia and could end up putting the humbled Tiger economies in a better position to compete globally. If Asian governments allow weak players to get weeded out, a much needed rationalization of such key sectors as finance and telecommunications can proceed. By dramatically liberalizing direct foreign investment, East Asian nations would get the capital, technology, and managerial skills needed to compete in everything from shipbuilding to semiconductors.
JUMP START. For foreign companies, the opportunities are breathtaking. Long accustomed to begging for a chance to invest, multinationals are having the novel sensation of being wooed. What's for sale? "Just about everything," says Henry van Dyke V, managing director at Morgan Stanley Asia Ltd. in Hong Kong, one of the many investment bankers who have swarmed into Asia in recent months looking for deals.
The lure is a chance to gain ground in what is still expected to be among the world's biggest growth markets in the 21st century. Big Three auto makers would rather tie up with established Asian players on good terms than build more plants from scratch. Some sectors, such as insurance in Malaysia and retail in Indonesia, are no longer off-limits. An overhaul of foreign investment rules as part of the International Monetary Fund bailout will make Indonesia, Korea, and Thailand vastly more open and transparent.
If there is danger in the dealmaking spree, it's that some foreigners may not know quite what they are getting into. A look under the hood at most troubled Asian companies reveals weak management, byzantine cross-holdings, and murky record-keeping, often designed to conceal losses from the public and profits from the tax collector. That makes due diligence a major headache. Another snag is that local companies, reluctant to sell assets on the cheap, are balking at marking down prices. In the end, they may be destroying what value is left in their assets.
There are cultural pitfalls in Asia as well. Korea is notoriously xenophobic. Media campaigns urging consumers not to buy foreign consumer items are a long tradition. So are brutal labor strikes. While many locals will be happy to work for a good multinational, an insensitive downsizing by new foreign bosses could provoke a backlash among workers who had been promised job security. There also is the hazard that once Asia's Tigers are back on their feet, they'll revert to practices that favor the family and friends of politicians and damage the interests of foreign investors.
NO RUSH. Another factor holding back a full-fledged clearance sale is Asia's lenient bankruptcy codes. In Thailand, even if a company is in default on loans, the owner can tie creditors up in the courts for years. So most troubled tycoons are in no rush to liquidate. "Getting deals done will be very difficult," warns Gary Stead, Merrill Lynch's Singapore-based managing director in charge of Asian M&A. Establishing workout procedures for insolvent companies is now a high IMF priority.
Still, the obstacles aren't slowing down investment bankers such as Stead. In the past year, he has increased his M&A team from 3 to 16 and is still hiring. Merrill is getting at least one call every day from new investors, often multinationals that want to bulk up in the region. Morgan Stanley, which is now prowling for 40 clients seeking Asian M&As, says it's turning down more business than it's accepting.
While it will take many years for Asia to match the U.S. or the European Union in high-powered M&As, the changes will be revolutionary nonetheless. Korea's cash-strapped chaebol have led the way in flogging their assets, making moves that were hard to imagine six months ago. Coke and Procter & Gamble Co. have picked up big bottling and paper operations from troubled chaebol. The Daesang Group is talking to Cargill and Tyson Foods Inc. as part of its drive to raise $1 billion by unloading a wide range of businesses. And Asiana Airlines Inc., Korea's second-largest carrier, is lobbying the government to drop protectionist barriers so it can sell a 50% share to a foreign airline.
Hanwha Group illustrates why chaebol are in such dire straits. At the end of 1996, the last period for which full data are available, Hanwha reported a $200 million loss and a $1.3 billion debt--more than six times its equity. Its troubles have since deepened. It opened a gleaming office tower in Seoul last year, just in time for the IMF bailout and an economic downturn. Its only choice was to start selling businesses. BASF Corp. and Japan's NSK Ltd. took control of their chemical joint ventures. Hanwha sold a 20% stake in its money-management firm to New York's Alliance Capital Management Corp. Now, Caltex Petroleum, Royal Dutch Shell Group, and other oil giants are taking a look at Hanwha's crown jewel, an oil refinery valued at $2.2 billion. The deal would be the largest foreign acquisition in Asia outside of Japan. "The chaebol have tried to avoid downsizing," says Park Kyung Min, chief investment officer at Asset Korea Capital Management. "But they have no choice."
CARS ARE IT. The big test of how desperate the chaebol are will be in autos, a heavily protected and massively overbuilt industry that goes to the core of Korea's nationalist goal of overtaking Japan. The talks getting the most attention now are between Ford Motor Co. and Samsung, which started in mid-February. Although Samsung won't start selling cars until next month, it's already in big trouble. Its $1.6 billion investment in a new auto plant is threatening to hobble the entire group at a time when its flagship--Samsung Electronics--must expand in semiconductors.
If Ford and Samsung strike an alliance, analysts speculate, the joint venture could then try to take over bankrupt Kia Motors Corp. and become a major new Asian force in cars. Ford and its Mazda Motor Corp. affiliate already own 17% of Kia, which sells Festiva cars in Asia and Latin America. "If we can find a way of saving Kia and improving our financial and operational flexibility, then that is something we would be interested in," says Ford Vice-Chairman W. Wayne Booker. Before it makes a move, however, Ford wants local banks to write off some of their massive loans to Kia, and it wants the Korean government to relax foreign investment regulations. "We're not going to be the banker for Kia," Booker says.
A big Korean deal would fit nicely into the designs of Ford and General Motors Corp., both of which hope to improve their minuscule share of the Asian auto market to 10% in the next decade or so. Until now, both companies have been building their own plants around Asia. It would be cheaper to take over or buy into another regional player. GM has been discussing a possible merger with former joint-venture partner Daewoo Motor, just six years after a bitter corporate divorce. Now, Daewoo needs money. Besides making gains in Korea, GM may want to use Daewoo's plant in Poland.
TUMBLING DOWN. While auto deals would grab headlines, the most profound impact of the Asian merger wave is in financial services. Badly supervised banks and brokerages are behind many of Asia's problems today. With their tight links to bureaucrats and powerful businessmen, they funneled Asia's high savings into pet industrial and property projects with little regard for profitability. Getting them into the hands of new owners is a must for straightening out Asia's mess.
That's starting to happen. Merrill Lynch, which had worked for years to establish a major presence in Japan but which was no match for the cozy domestic cartel that dominates the nation's $23 billion brokerage industry, got its big chance with the November collapse of Yamaichi Securities Co. On Feb. 12, Merrill scooped up 30 branch offices-- staffed by some 2,000 former Yamaichi employees. Crows President Herbert M. Allison Jr.: "Merrill Lynch is bullish about Japan."
The protective walls around Asia's banking sector also are crumbling, both because of IMF prescriptions and the parlous financial condition. East Asia's commercial banks alone must raise at least $260 billion in new capital to get back on their feet, estimates J.P. Morgan Securities Asia Ltd. The needs of undercapitalized leasing companies and insurers are also huge.
There is no shortage of foreign interest. Merrill Lynch estimates that $10 billion in venture capital and vulture funds alone are ready to flood into Asia. That's not counting the resources of big institutions like Citibank, GE Capital Services Inc., and American International Group, which are well established in Asia and hope to expand.
Actual deals thus far have been modest because governments haven't completely opened the doors to foreign takeovers--and the balance sheets of many local institutions have been damaged seriously by years of bad lending. But there are important breakthroughs. Banque Nationale de Paris bought the China corporate finance business of bankrupt Peregrine Investments Holdings Ltd., while Prudential Securities Inc. picked up Thai broker Nava Securities. GE Capital has taken over troubled Thai consumer-finance firms and has set up a $1.15 billion joint venture with Japan's ailing Toho Mutual Life Insurance Co.
WAIT AND SEE. In the main, however, big foreign institutions are still window-shopping. After spending months poring over the books at First Bangkok City Bank Ltd., Citibank decided to put the deal on hold. Aetna Inc. figured Thai insurance companies were such a mess that doing proper due diligence would cost more than the deals were worth. It's setting up a new joint venture instead. One reason foreigners are sitting on their wallets in Thailand is that the government still attaches too many strings to financial takeovers. "We'll be watching to see their intent in making available to Western companies true licenses to do business over a long period of time," says GE Capital Chairman Gary C. Wendt.
Considering the severity of Asia's banking crisis, investors figure they can afford to wait. Zafer Achi, head of Booz, Allen & Hamilton Inc. in Indonesia, estimates that the 240 banks in Indonesia will be whittled down to about 20 within several years.
The landscape of Asia's telecom sector also is likely to change. Hong Kong's First Pacific Group has sold its faltering cellular unit to the dominant player, Hong Kong Telecom, for $350 million. Investment bankers also expect consolidation in Indonesia, the Philippines, and Thailand. It's now cheaper to buy a market leader in cellular than it would have been to get a third-tier player two years ago. If barriers to foreign ownership fall, says A.T. Kearney (Hong Kong) Ltd. Vice-President Alex Liu, "there's no reason there shouldn't be a pan-Asian telecom company."
Opportunists are also hovering over distressed property developments, figuring their owners must bail out soon. Regent Pacific Group Ltd., a Hong Kong mutual-fund house, raised $50 million in one week in February for a vulture fund and plans to raise $500 million in the next several months. Regent has already snapped up 500 brand-new downtown Jakarta apartments for as little as 90% less than the $1,600 per square meter they would have fetched before the crash. In early February, Asia Pacific Land Ltd., a Hong Kong property investor, got an unsolicited call from a U.S. investment firm ready to plunk down $200 million for Asian real estate. "This is the kind of event that happens every 30 to 50 years," says Asia Pacific President William D. Schoenfeld.
The few local investors with cash are well positioned. The Singapore government and its state-backed banks and corporations are in the market for opportunities. Singapore's DBS Bank just bought Thailand's 12th-largest bank, Thai Sri Danu, along with the Philippines' Bank of Southeast Asia. Analysts say government-owned investment arm Temasek Holdings is eager for regional investments. "The Singapore government is in a terrific position," says Goldman Sachs (Asia) Managing Director Timothy D. Dattels.
Indeed, multinationals in almost every industry are surveying the smorgasbord of targets: auto parts, chemicals, steel, hotels--the menu is endless. A survey of U.S. and European multinationals by consultants Renaissance Technomic found that 64% intended to step up Asian acquisitions. "We are pleasantly surprised with the quality and quantity of opportunities that have emerged," says Peter N. Louras, group vice-president of Clorox Co., which is negotiating with several possible sellers.
The question is how great all these bargains will seem several years from now. Most buyers are likely to find they must invest more heavily than expected in management, training, and equipment to make their acquisitions viable. Georgia's Southern Co. learned this lesson last year, when it bought Consolidated Electric Power Asia Ltd. from Hong Kong tycoon Gordon Y.S. Wu for $2.1 billion.
The deal gave fast-growing Southern a strong stake in Asia, with plants in the Philippines and China and a coal mine in Australia. But CEPA's chief executive left within months of the deal, forcing Southern to dispatch its chief financial officer to Hong Kong to run things. "We probably should have done a better job of vetting the management," says CEPA's new CEO, Raymond D. Hill. Undeterred, CEPA is shopping for new assets in Asia.
FIRE NEXT TIME. Another cause for pause is that buyers still think the prices being asked for distressed assets are too high, and that the most desirable companies aren't yet for sale--even though the owners are technically insolvent. Asian banks, meanwhile, have been hesitant to write off bad corporate loans for fear of damaging long-term relationships and taking huge hits to their balance sheets. A real fire sale won't come until Asian countries reform their bankruptcy laws and until regulators force banks to seize and sell off deadbeat companies. As long as corporations are loaded with huge debts, foreign suitors will look--but won't buy. Instead, they will wait for prices to drop, knowing that there are no easy fixes to the domestic debt crisis in Indonesia, Japan, Korea, or Thailand.
How Asian governments carry out IMF reforms will determine whether the transition to a more open investment climate will be relatively smooth--or long and maddening. The frequent policy flip-flops of Indonesian President Suharto are one reminder that the business interests of his family and friends will remain paramount.
But if governments stick to the IMF programs, a legal framework for M&A will emerge. Corporate Asia won't transform overnight. Cross-border M&A is so new to Asia that failed marriages and policy retrenchments are likely. But the current takeovers will be a valuable learning exercise for governments and companies alike. The ground is being laid for much grander dealmaking to come.By Mark Clifford in Hong Kong, with Moon Ihlwan in Seoul, John Rossant in Rome, Keith Naughton in Detroit, and Pete Engardio in New YorkReturn to top