Valuing Asia's Bargains

Though sometimes risky, investments promise solid payoffs.

For more than two years, Midland, Mich.-based Dow Chemical Co. has been increasing its investment in Asia. For example, in 1999, truly a year of living dangerously in Indonesia, Dow bought the Salim Group's stake in PT Pacific Indomas Pratama Indonesia, a polystyrene producer. During the last two years, Dow also has taken 100% ownership of a latex operation in South Korea and a polyolefin facility in China. It has started up -- or announced -- new investments in Thailand, South Korea, and China. "There's also the proposed merger [between Dow] and Union Carbide Corp., which, after approval, will increase our position in the Pacific significantly," adds Hong Kong-based Patrick Ho, president of Dow Chemical Pacific Ltd. Dow, however, is not the only company seeking to grow value by bargain hunting and investment as Asia comes back from the severe financial crisis precipitated by the collapse of Thailand's currency in July 1997. For instance, in April 1999, Fairchild Semiconductor Corp., South Portland, Maine, acquired the power-device division of South Korea's Samsung Electronics Co. Ltd. for US$450 million. In September 1999 Applied Materials Inc., Santa Clara, Calif., announced its intention to acquire Komatsu Ltd.'s 50% interest in Applied Komatsu Technology Inc., a joint venture it had with the Japanese industrial-equipment firm. In October 1999 Dell Computer Corp., Round Rock, Tex., invested $200 million in Samsung, which will use the money to increase production of flat-panel displays. And Switzerland-based Novartis AG, a pharmaceutical firm, revealed in October that it's eyeing drug makers and consumer-health-product companies in Asia. Indeed, a majority of executives -- some 51% -- polled by Chicago-based A.T. Kearney Inc. indicated last June that the Asian financial crisis and its aftermath had created acquisition opportunities for their firms. Mergers and acquisitions (M&A) have increased in such crisis-hit Asian nations as Thailand, South Korea, and the Philippines, confirms James Zhan, an expert in foreign direct investment (FDI) in Asia at the Geneva, Switzerland-based United Nations Conference on Trade and Development (UNCTAD). Remarkably, while overall FDI in Asia was declining 11.5% between 1997 and 1998 -- to US$85 billion from $96 billion --investment in Thailand, South Korea, and the Philippines surged. The money flowing into Thailand jumped to $6.9 billion from $3.7 billion, while investment in South Korea grew to $5.1 billion from $2.8 billion. The Philippines saw an increase to $1.7 billion from $1.2 billion. "It shows the tendency of transnational corporations to shift their mode of entry from greenfield plants to mergers and acquisitions," says Zhan. Driving the investment activity are some impressive bargains -- and increased leverage for the companies doing the buying. In some cases, the acquired firms are being grabbed up for as much as 80% less than they would have before the crisis hit, says Mark Tygart, an information specialist with Emerge Corp., a Costa Mesa, Calif., consulting firm that works the middle-market M&A arena. At the same time, the crisis has made many Asian government and company executives more receptive to foreign investment. "Countries in crisis encourage foreign investment," observes UNCTAD's Zhan. With generally low sales prices and the willingness of many of the selling firms to be flexible in negotiations, Asian investments make good business sense, say several experts. "Companies have the ability to enter new markets that a lot of them didn't have access to before," states Ben Smith, a Silicon Valley-based principal with A.T. Kearney's high-tech knowledge practice. U.S. and other foreign firms making strategic acquisitions in Asia are likely to do well in the now-heady M&A environment, says Edward H. Tillinghast III, head of the Bankruptcy and Business Reorganization Dept. and coordinator of the Asia/Pacific Insolvency and Restructuring team with the New York-based law firm Coudert Brothers. Such buyers are likely to take a long-term view and have realistic expectations of the bumpy road ahead. The bumps include political instability, a backlash against FDI, and fragile economies. In contrast, investors who enter the region hoping to reap a quick profit by, for example, purchasing debt cheaply and turning it around and reselling it face a more difficult task. Asian acquisitions are not exactly low-risk. One of the most serious is the absence of fully "transparent" company financial statements. The financial reports may not show all the material obligations of the company, stresses Meredith Brown, partner and head of the M&A practice group within Deveboi & Plimpton, a New York-based law firm. In addition, the rules governing bankruptcy and reorganizations short of bankruptcy often are being written case-by-case, says Brown. What's more, cultural issues in cross-border deals "can absolutely be a stumbling block," making it difficult for the transaction to meet the expectations set for it, says Maximilian Schroeck, a principal in the Santa Clara, Calif., office of A.T. Kearney and an expert in postmerger integration. Kearney declines, however, to cite specific examples. Finally, it's not clear just how vigorous Asia's economic recovery is going to be, claims David McClain, economic consultant to Babson-United Investment Advisors, Watertown, Mass., and a professor at the University of Hawaii, Honolulu. He specializes in the Asian and Latin American economies. "People now think that Asia is back on track and the green lights are on -- that we're back to the miracle economies," says McClain. However, the economies in the region have been severely shaken, and McClain questions whether their financial and regulatory institutions are capable of handling a resurgence in growth. Minimizing risk Still, companies can exploit investment opportunities in Asia with a fair degree of confidence. Here's a checklist of the essentials for minimizing risk:

  • Know what you want. If an immediate short-term price break is what you're looking for, simply renegotiating a supply contract to take advantage of the strong dollar may be the best bet, says A.T. Kearney's Smith. He says discounts can reach 20% to 30%. Additional issues that may be up for negotiation include such things as a guarantee of an allocation of a product and an opening-up of distribution opportunities. On the other hand, if you're really looking to stabilize and increase your control over your supply chain, an acquisition may be the most logical route.
  • Be proactive. Because there isn't a long history of deals in the region, the market isn't as efficient as it often is in other parts of the world. Consequently, not everyone finds out about every deal. Companies that have hunted and dug out deals have been the most successful, says Kearney's Smith.
  • Pay attention to postdeal integration. In the thrill of the hunt, it's easy to overlook the work that's necessary after you sign on the dotted line. A.T. Kearney's Schroeck notes that most merger-integration teams tend to be understaffed, as management dismisses the magnitude of the effort. A result can be that significant opportunities are wasted.
  • Think before cleaning house. While getting rid of the management team in place is de rigueur in many domestic acquisitions, purchasers of Asian companies may want to keep more of the operations-management team in place. "You may clean [house] some, but you want to keep manufacturing and engineering operations," says Kearney's Smith.
  • Communicate early successes. Increasingly, investors watch every step and clamor for news. "The more you can communicate the economic results of the merger, the better you can stabilize your share price," says Kearney's Schroeck.
  • Expect surprises. Given differences in accounting systems and standards around the world, due diligence becomes critical. On the other hand, consummating a deal may require moving quickly. One option: Do the deal with a reasonable level of investigation, but recognize that you may have to inject more money into the business to keep it going. Finally, the firms that survive Asia's financial crisis are likely to be more effectively run as they bring their newfound perspective and recent experience to bear. "The mistakes have been excessive, and you get tightness during recession," says James Squire, a Hong Kong-based portfolio manager with Baring Asset Management Holdings Ltd., London. "It leads to more efficient businesses."
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