Agenda Daily

Merging for the better

ykadirx The country’s bank consolidation exercise takes another interesting turn with the proposed takeover of RHB Capital by suitors Malayan Banking and CIMB Group Holdings. Whatever the outcome, it must not turn out to be a mega-merger for the sake of being the biggest without any real benefits for all parties involved, especially minority shareholders and personnel.

MALAYSIA’S SEE-SAW BANK CONSOLIDATION TAKES another turn. In the midst of a flurry of the issuance of banking licences to foreign banks, Bank Negara Malaysia on May 31 approved another takeover negotiation.
This time it involves the fourth largest domestic bank, RHB Capital, the operator of RHB Bank. The approved suitors are Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd.
Back in the late 1 990s, following the Asian Financial Crisis, the government mandated a series of takeovers and mergers to reduce the number of local banks and create larger financial groups that could better withstand future global financial crises.
In recent years, however, in line with its market-opening policy, the administration of Prime Minister Datuk Sen Mohd Najib Abdul Razak, had granted licences to several foreign banks.
As the country loses its shine as the centre for the production of cheap and intermediate goods, Mohd Najib is counting on the services sector, of which financial services are a key player, to stop Malaysia’s slide and then on to propel it to the ranks of a high-income economy.
Among the foreign beneficiaries of the government’s financial market opening were the Bank of China and France’s BNP Paribas. On top of that, the Central Bank has also granted Islamic banking licences to foreign banks including HSBC and Deutsche Bank.
Apart from the business consideration of the parties involved, this latest takeover exercise could also be seen within the context of the internationalisation of the domestic capital and financial markets.
To keep pace with the giant international players now crowding the local market, the Malaysian government wants domestic operators to be bigger and stronger.
A successful merger with RHB Capital by either bidder will create a superbank.
The bidding for RHB Capital comes hot on the heels of the acrimonious takeover of EON Capital by Hong Leong Bank Bhd for RM5.lbillion and Maybank’s nearly RM5 billion purchase of Singapore’s Kim Eng Holdings, a securities firm.

THE BIDDING for the control of RHB Capital, irrespective of whether it’s a tame, friendly affair or a bruising corporate war, will prove to be a tricky affair.
It could be a benign friendly affair or an all-out corporate slugfest, but the all-round effects would still be significant. The latter prospects may excite analysts and promote a feeding frenzy among market punters, but it may not necessarily be good for parties involved, including the government.
Let’s consider the facts by first looking at the players. To start with, they all trace their origins and owe their responsibility to one common entity — the government.
The subject of the takeover, RHB Capital, is 45% controlled by the state-owned Employees’ Provident Fund (EPF). Surely, the government wants the EPF to get the best possible deal to keep its 12.8 million registered contributors, more than half of whom are active, happy.
In recent years, they have been complaining that the fund’s annual dividend has been off its best and is straining the lives of pensioners at the time of rising inflation. The dividend has been falling steadily from the 8% range in the 1 980s to as low as 4.25% in 2002 before slowly clawing its way back to 5.8% last year.
Much to its credit, the EPF has made considerable capital gains since taking over control of RHB Capital in 2007. It paid RM4.76 for each share and in the following year, sold 25% of its holding to the Abu Dhabi Commercial Bank (ADCB) for RM7.20 a share.

The bidders too are closely tied to the government. Maybank is 52% held by Permodalan Nasional Bhd (PBN) while CIMB Holdings is 28.5% controlled by Khazanah Nasional Bhd.
To make it even more interesting, the EPF, which is the vendor of RHB Capital shares, is also in a polygamous relationship with both Maybank and 01MB. It owns 10.35% of Maybank’s shares and 12% of CIMB’s.
Then, there is the non-national player, the ADCB, which owns 25% of RHB Capital’s shares. It too is selling its stake, but not necessarily to either of the bidders.
The Star newspaper reported that ADCB has received bids from Japan’s Sumitomo Mitsui Financial Group, a Chinesè bank and several private equity firms, including the Carlyle Group.
But it quoted sources as saying that the ADCB would most likely sell the shares to another Abu Dhabi entity, the state- owned sovereign wealth fund, the Abu Dhabi Investment Council (Adic).
So, it may not matter much to EPF who gets to acquire RHB Capital as long as it is offered a fair price. At the prevailing market price, the fund stands to rake in as much as RM1O billion from the sale.
Fair price is going to be a tricky matter. An all-out bidding war is good for RHB Capital’s shareholders, but could hurt  the buyer.
Since the announcement was made, RHB Capital’s shares have been re-valued upward, but those of Maybank and CIMB suffered a temporary decline.
As at June 10, Maybank shares were trading at around RM8.80, a slightly lower price than they were on May 31, while CIMB at RM8.40 was flat.
One cannot fault the investors for their reaction. The bigger discount on Maybank shares could have been prompted by the bad memory of the bank’s bad call when acquiring Bank Internasional Indonesia (Bil) in 2008. It paid 4.7 times the book value, which was twice the average valuation at that time.
It’s unthinkable that the new Maybank management under Datuk Abdul Wahid Omar would follow the dark path of its disgraced predecessors. In 2009, he had to write down RM1 .97 billion in impairment charges on the bad investments in Pakistan and Indonesia.
Although that happened under the bank’s previous management and during the tenure of the previous Prime Minister, the market, it seems, has not yet forgiven the bank. Belatedly, the people responsible for the bad Indonesian decision were removed from the board and management.
Maybank’s new management has apparently learnt a valuable lesson from the miscalculations of its predecessors. Abdul Wahid was recently quoted as saying that the bank would be disciplined in approaching the takeover bid, telling the CNBC business news channel, that: We will do something if it makes sense for both stakeholders, for us it is still early~ days.’
At the end of the day, the Prime Minister, who also holds the finance portfolio, would have the last say, assuming that the offers are about even if there’s a deadlock.
If he sides ~with Maybank, he is doing a favour to PNB and, by extension, to the millions of its unit trust holders — Bumiputeras and non-Bumiputeras alike. In fact, according to Maybank’s official website, 46.57% of its shares are registered under Skim Amanah Saham Bumiputera (Bumiputera Unit Trust Scheme) and 5.47% under PNB.
On the other hand, if Mohd Najib leans towards CIMB, he wiIl be favouring Khazanah, which is a major contributor to the government’s coffers. Also, it will not miss public attention that CIMB is the domain of his brother, Datuk Sen Mohd Nazir Abdul Razak, who is the group’s managing director and chief executive officer.
In a nutshell, this deal calls for caution. It should not be allowed to turn into another Sime Darby- type mega-merger, which was a nightmare for PNB.
As such, it is incumbent upon PNB to ensure that its flagship banking investment does not end up like the Sime Darby deal.
While PNB cannot be faulted for wanting to see Maybank grow and become a major player in the domestic and international financial markets, it has the interest of millions of unit trust holders to safeguard.
The same applies to Khazanah. Its Managing Director, Tan Sri Azman Mokhtar, makes no qualms about labelling CIMB as Khazanah’s crown jewel and it’s only natural that he wants the banking group to go places.
But he has to bear in mind that even before the bidding starts, the investors are already wary of the possible negative effects of the deal on the financial group.
This, inevitably, leads us to the question: Would the~, merger benefit customers by way of improved services and greater access to financing, or will it lead to staff retrenchment and regressive rationalisation? This takeover is too big to hide from public view. It will most certainly be keenly watched.-14/7/2011

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