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The politics of mergers (1) January 17, 2007

Posted by elizabethwong in Columns, Economy, Malaysia, Note2Self, Politics.

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)



1. Johan - January 19, 2007

I’ll be the first to comment, since there are no takers on this issue at the moment…

As far as I know, which is evident in the Bursa announcement, PNB didn’t ask for an extension, but GHope did for I was told mainly to iron out the details in the agreement. I was also informed the extension was given to GHope and that it is only fair others are given the same.

Point number two — you said that PNB appears to be attempting to safeguard shareholders’ interests, which admittedly is a novel move but I just don’t buy it.

I see it as them shooting itself in the foot when the proposed making the deal inter-conditional, especially when they know that the market has responded positively to the merger and that they would most probably vote for the sale of the assets, but if votes come short on asset disposal, you would have a giant of a company with no assets and businesses and they would then have to file for bankruptcy. In the end, who interests is PNB protecting?

My question is why the sudden change of heart in PNB? Why “rah rah” in the beginning and now say “I’m not happy?” – shouldn’t have they put their foot down in the very first day and not when the merger is well on its way?

You mentioned about transparency and I agree that transparency is about being honest, being open about the entire process and about choice.

But guess what, in this case the companies did have a choice – they had a choice to say no or yes even amidst pressure from the top, evident today in the NST and Utusan which is now off despite Pak Lah mooting the idea in the first place.

These companies were given time to assess the proposal but guess what they all said yes! So, my question is what’s up with the cold feet?

You must be wondering am I mad or am I pro government. My answer to all you people out there is that it’s all about “nationalism”!! I want to be proud of a Malaysian initiative after seeing so many failed, the worst being the MSC initiative.

At the end of the day, we will be creating the largest plantation entity in the world and if the benefits can be achieved, who wouldn’t want that? They’ll be mad not to!

2. elizabethwong - January 19, 2007

Dear AJ,

I am of the opinion that you have raised some very important questions. Certainly one should study the pros and cons of the merger before agreeing or disagreeing to it. I would however disagree that the companies have had enough time to adequately assess the proposal.

The last thing we want is another failed venture that benefits a handful of people but not the millions of ordinary Malaysians who have invested their hard-earned savings in PNB’s unit trust funds.

3. The politics of mergers (2) « elizabeth wong - January 24, 2007

[…] The politics of mergers (2) January 24, 2007 Posted by elizabethwong in Current Affairs, Malaysia, Economy, Note2Self. trackback Part (1) here […]

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