Introduction This article talks about Simi Dairy Bertha (SD), the largest multinational company in Malaysia, which has recently acquired 30% of Eastern & Oriental Bertha (E&O)’s shares from 3 of its main stakeholders – E Managing Director and founding member Dates Than Aka Hon., Tan Sir Wan Zamia Wan Yamaha, and GO Gogh Holdings Limited (Singapore). In our critique, we will discuss the factors influencing Sad’s decision, the impact of this acquisition on stock prices of both companies, and how the market would react if SD was obliged to make a Mandatory General Offer (MGM) to buy out all E&O shares.
M&A – Diversification SD is a leading multinational conglomerate in Malaysia, with a net worth of SUDSY. 34 billion. It has six divisions, with the property division’s revenue contribution at a distant fourth behind the Motor, Plantation, and Industrial divisions’ . Despite 40 years of experience in developing property, much of SD Property prime land bank still remains undeveloped. SD has chosen to diversify and strengthen its property division by acquiring expertise in various niche markets; working with and getting a feel of operations of well-known players in these fields .
Similar to a diversified investment portfolio, strengthening and diversifying each division allows SD to better hedge against economic downturns, as property markets respond differently to economic shocks compared to Sad’s other core divisions. M – Synergy Along with this 30% acquisition, a 3-year collaboration agreement to retain the current MD Dates Than Aka Hon. and his management team was signed, retaining expertise of its current management in addition to having access to coveted land in Penman (a 100% acquisition would likely lead to loss of human expertise through stile takeover).
With this acquisition, SD can leverage on the talent, branding and experience of E as a niche property developer. SD has already made plans to send some of their property division staff to E’s largest current project (worth ARM 10 billion) for exposure . As R&D processes and core competencies are shared, technical capacity and innovation will be enhanced, accelerating value creation and making SD stronger, ultimately increasing share value. SD is also buying goodwill from E&O’s premier brand name. E has shown robust growth with profits surging from ARMOR. Million in 2010 to RAMMER. Million in 2011 . The stellar performance is expected to continue, given new collaborations with Mitosis Fedoras, Khans & Tamales Holdings. Sad’s mammoth size necessitates the need to constantly seek growth opportunities to prevent stagnation. The fastest way is through mergers and acquisitions. As this acquisition was made at ARM 2. 30 per share (58. 6% premium over the pre- suspension price of ARM 1. 45 per share), with a PIE ratio of 19, investors have been questioning the wisdom of Sad’s decision. However, the acquisition price is a 20% account below E’s RNA (ARM. 91 per share).
RNA is a more reliable measure because SD intends to hold the stocks long-term. From a value investor’s perspective, profitability and growth opportunities should be considered instead of short-term capital gains. From E’s perspective, gaining a strong backer like SD will boost its credit rating, allowing it to secure capital more easily, in turn aiding expansion to other lucrative sectors. Stock Prices Sad’s stock price did not change significantly after the acquisition until five days later, where it saw a slight dip . This can be attributed to information lag between announcement of the purchase and reactions by stockholders.
In addition, there is uncertainty involved in this acquisition as property prices in Malaysia have been relatively high in 2011 . Given a possible depression induced by the European and US debt crisis, future property prices can be unpredictable and this can easily dampen profits of E, hence SD. This entailed a loss of confidence in SD stocks, pushing prices down. On September 19, the conglomerate’s shares hit a 13-month low of ARM 7. 70, due to uncertainties about SD needing to proceed with a Mandatory General Offer (MGM) to fully acquire E&O at the costly price of ARM 2. 0 per share, should SD and E&O MD Dates Than Aka Hon. be found guilty by the Malaysian Securities Commission (SC) of being parties acting in concert. This MGM would be costly to SD, as a full acquisition has little impact on Sad’s projected earnings for 2012 and 2013. Many investors already feel that the current acquisition is too expensive since the amount spent could be better utilized to improve current expertise or develop its other divisions . Had SC ruled in favor of the MGM, Sad’s stock price would definitely fall. Fortunately, SC ruled against the need for an MGM on October 11.
In contrast, E&O’s stock price rose by 20% immediately after Sad’s purchase of 30 million E&O stocks was announced. The sudden surge in demand for E&O stocks understandably boosts E&O’s stock price, coupled with effects from the MGM speculation. In the long run, Sad’s stock price is uneducated by this acquisition, regardless to M This is because the Motor, Plantation, and Industrial divisions are still Sad’s key growth engines; strong earnings by the Property Division are unlikely to mitigate reduced profits (or losses) by other sectors.
Assuming SD continues to strengthen all sectors, there will be growth in the stocks intrinsic value. Upon diversifying and gaining expertise in niche areas, SD consequently has greater resistance against the fluctuations faced by individual sectors. Conclusion Despite the massive amounts of capital exhausted in this acquisition, the only practical advantage SD can derive would be the ability to harness talent from E, with other benefits like being secondary. Had this acquisition been attempted by other less-established firms, it would be unwise given the poor returns.
However, since SD has vast resources, this acquisition would be strategic as it allows SD to gain expertise and leverage in these acquired niche markets far more quickly than normally required. Appendix l: Reference List Simi Dairy Bertha News Release (2011, Gauge 27) “Simi Dairy to acquire 30 percent equity interest in Eastern and Oriental Bertha” Retrieved from: http:// www. Similarly. Com/ Simi_Dairy_to_acquire_30_percent_equity_interest_in_Eastern_and_Oriental_Bertha. Asps