Valuing Asia's Bargains

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: