The politics of mergers (1)

Permodalan Nasional Bhd (PNB) has asked for an extension, from January 15th to the 29th, apparently due to disagreements with Synergy Drive Sdn Bhd, led by the CEO of Sime Darby Datuk Ahmad Zubir Murshid, and merchant bank CIMB.

The Edge Daily quoted sources who said, “(T)he main contention was a disagreement over whether the sale of assets of the PNB companies to Synergy Drive should be made inter-conditional to a capital distribution proposal.”

PNB owns owns 39.4 % of Sime Darby, 64.7 % of Kump. Guthrie and 51.8 % of Golden Hope. While news of the merger of these <em>Big Three</em> centre on the combined ownership of plantations, very little is said about the rest of the assets, which are in turn extremely lucrative businesses, including real estate, engineering, construction and others.

The merger involves the combination of assets disposal and capital distribution. To put it simply, in the first phase, all companies will have to sell their assets to Synergy Drive, which will then exchange them Redeemable Convertible Preference Shares (RCPS). Then, the second phase of this merger exercise is the capital distribution of these RCPS to shareholders.

By making them inter-conditional, PNB appears to be attempting to safeguard shareholders’ interests.

This is because the first part of merger, i.e. to sell the assets to Synergy Drive, requires a simple majority decision the shareholders, but the second part, i.e. capital distribution needs 75% approval from the shareholders.

To make them inter-conditional means, if the companies do not get the 75% majority votes, then the first part of the deal is off (sale of assets). This is to ensure that assets sold in the first place, do not end up in the pockets of Synergy Drive, and shareholders don’t end up with worthless pieces of paper, in the event part two fails.

CIMB is said to be against PNB’s demand to make it inter-conditional.

The question is, why?

Wouldn’t it be in the interest of CIMB to assure shareholders that it’s a win-win situation for all? Is it PNB or CIMB which is lacking in confidence in securing 75% votes of phase two? Have the rumblings on the ground grown louder to unsettle PNB, that it is trying to insist on these conditions?

Now the politics.

Lest we forget, when the news first broke, PNB was quoted as being the proponent of the merger. A bewildered PNB told an equally bewildered media that it had no clue what was going on. The Prime Minister and his deputy, nonetheless, came out to laud the merger.

It was only later that CIMB CEO came out to ‘confess’ that it had mooted the idea, and that it would create the special purpose vehicle, Synergy Drive, to operationalise the merger (and by then, detractors had already pointed out the acronym S.D. referred instead to Sime Darby). The CEO had also promised full transparency in the entire process, perhaps referring to the above fiasco.

But transparency isn’t just about being honest and open about the entire process. It is also about giving the shareholders, and by default, the Malaysian public, an informed choice. And the key word here is ‘Choice’.

When the Prime Minister comes out the next day, after PNB called for a postponement to iron out the details, to insist that the merger will proceed as planned, it provides a small picture that perhaps, just perhaps, not everyone has been open.

After all, everyone has been mum about what will become of their plantation assets in Indonesia, the latter having a law which prevents a foreign company from holding more than 60,000ha. This means, the merged entity will have to forgo 120,000ha, or 20% of its current total of 600,000ha plantation land.

What of other assets? All three companies hold extremely lucrative businesses, ranging from real estate to engineering to construction. Are there already buyers lined up to strip or takeover these assets? Is it a ‘done deal’ as claimed by analysts including an unnamed source from RHB and ECM-Avenue Bhd executive director Hoo See Kheng? (See NST,<em> ‘Merger of plantation firms to proceed’</em>,17 January 2007)

So why the insistence? The Prime Minister could hardly be a model for decisiveness if we recall, during the time of the tussle over DRB-Hicom. While the Prime Minister chairs Yayasan Pelaburan Bumiputra, the parent company of PNB (100% less one share), perhaps he should easily reason with himself why PNB is hesitant.

Especially since any mistake, devaluation or depreciation of shares may adversely affect PNB’s 7 million investors, or, close to a third of the Malaysian population. (WIP)

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