Are You a Target?

With M&As in full swing, many CFOs will find themselves in a purchased company. Here's how to manage the transition.
Tom LeanderMarch 2, 2007

Meet Patrick Albert, a broad-shouldered man who went to college in Schenectady, New York, loves Tokyo, and calls himself CFO and general manager, Pacific finance, of Momentive Performance Materials. His title is new, by the way. Albert was CFO of Tokyo-based GE Toshiba Silicones until this December. But when Apollo Management, the US private equity buyer, bought the company for US$3.8 bn and changed its name, it asked Albert to stay on. It’s life in a very different world.

“Working for GE was like working for a giant mutual fund, and you could leverage off its resources,” he says. “But we’re not in a portfolio anymore.” There’s no cushion, no multinational resources — whether legal, risk management, or HR — to draw upon. Any problem must be fixed with capital coming directly from the owners. “Suddenly our jobs got a lot more important,” says Albert. Apollo financed its purchase with US$3 bn in debt. In this environment, “getting the foundations right” is not a luxury. A strong system of cost control and financial reporting ensures survival, says Albert, or “we simply won’t be able to do what we’re meant to do, which is grow EBITDA.”

Welcome to the M&A boom. There’s a certain euphoria associated with the trend. But CFOs in targeted companies can be forgiven for having mixed feelings. In the hunted company, enormous change is immediate and the threat of job extinction looms.

But like Albert, CFOs can — and do — adapt quickly. They’ll have to, as M&A activity will likely continue at a fast pace throughout the year. (See our list, “Targets Confidential,” below.) Private equity money is the catalyst. Merrill Lynch analyst Stephen Corry, based in Hong Kong, notes that the major global private equity firms are cashed up to the tune of US$25 bn, and will probably spend that amount globally in the next year-and-a-half.

Some of that — a source at a major fund puts the figure at US$15 bn — will be devoted to Asian businesses. Private equity investors expect greater returns from Asia than elsewhere. The region, after all, has the lion’s share of the world’s growth economies and some of the better demographics for consumer market growth. Valuations in Asia, too, are still comparatively low. Current deals average between 7.5 and 8 times economic value divided by earnings before interest, tax, depreciation, and amortization (ev/ebitda), as opposed to the US and Europe, where valuations of up to 12 times ev/ebitda are common.

One route of buyout firms such as Carlyle, TPG-Newbridge, and Kohlberg Kravis & Roberts — all big players in the region — is to install a new CFO after the deal as a change agent in the purchased company. But replacements are not the rule. “I would say that being CFO is a vulnerable position,” says Alain LeCouedic, partner with the Boston Consulting Group in Hong Kong. But, he adds, “CFOs who are seen as value drivers and who grasp the strategy of the new owner are just as likely to be seen as an ally.”

This gibes with the view of Jamie Paton, managing director and co-head of Asian operations for 3i, a UK private equity fund. “The key issue in our business is to work in partnership with the existing management teams,” he says. “For example, we’d like to be a long-term player in China but we’d like to do it in a Chinese way, for a Chinese market, and to market Chinese brands internationally. To do that, we need to work alongside Chinese management teams.”

That may be so, but a retained CFO will have to play ball in an entirely different way. LeCouedic says that the best way to work with a new private equity management is to be brutally honest about the company’s shortfalls and present a well-crafted strategy for fixing them. “Getting management to buy into this before the target is acquired is admittedly difficult,” says LeCouedic, “but preparation is golden.” Being able to demonstrate that such an effort was made will give management more leverage during negotiations and post-merger integration.

Martin Fahy, Asia-Pacific director of development for the Chartered Institute of Management Accountants, sees this scenario playing out as private equity funds target underperforming units of Asia’s large industrial conglomerates. Such transactions are likely, he argues, since many of Asia’s tightly held conglomerates are looking to sell non-core assets and may believe that funds will give them a better deal than their own competitors. “If the PE money walks up with a proposition to buy,” says Fahy, “it gives you a quick exit.” Fahy says a private equity firm will then either install a journeyman CFO or stick with a capable CFO who can drive topline growth and improve margins. That CFO should also be adept at raising debt to finance the deal and staying on the right side of debt covenants.

As Albert’s experience implies, one key to longevity is a healthy respect for governance in the post-merger company. But are there any iron-clad rules? It’s more art than science, the experts say. Oliver Stratton, an M&A partner with Bain & Company, advises private equity firms on screening potential targets and has seen many post-merger integrations in the region work — and not.

“If you want to keep your job as CFO and be part of the future of the business,” says Stratton, “you need to demonstrate that you are taking an objective view and making tough decisions, not coasting in a bureaucracy. The strategic acquirer picks this up very quickly, typically during the due diligence process.”

Finally, he says, “You’ve got to figure out whether you’re the right kind of person to stick it out with a private equity firm.”

As our list suggests, that’s a decision that may be on the minds of many Asian CFOs.

Targets Confidential

An incidental list of Asia’s sought-after companies, courtesy of mergermarket, a London mergers and acquisitions intelligence and research service.

Retail/Consumer Goods

Gree Electric Appliances Inc of Zhuhai

• Headquarters: Zhuhai, China

• Revenues: 18.2 bn renminbi (US$2.3 bn)

• Market Cap: 14.4 bn renminbi (US$1.9 bn)

Why a target: As leader in the air conditioner production industry in China, last year its sales topped that of its competitors. Its market share reached 21.1% in 2006, making this the cool play for instant domination in a hot sector.

Who’s rumored to buy: Possible buyers could include foreign private equities. Goldman Sachs’ private equity arm just bought a stake in Midea, another major electronic appliance maker in southern China, becoming the second-largest shareholder in the company. Other private-equity players may follow suit and make a bid for Gree.

MOS Food Services

• Headquarters: Tokyo, Japan

• Sales: 30 bn yen (US$247m)

• Market Cap: 48 bn yen (US$395m)

Why a target: MOS Food Services is an independent restaurant business operating about 1,500 franchise stores for flipping burgers and stirring udon across the country. MOS is the second-largest restaurant chain in Japan after US-based McDonald’s. Nonetheless, it has a shot at super-sizing itself over Mickey D’s, due to its brand power and skill at developing new products. The company is cash rich and generates solid profits quarter upon quarter, but like most fast-food restaurant operators in Japan, MOS is re-examining its survival strategy amid Japan’s declining population.

Who’s rumored to buy: Like its local rival Skylark, which went private last July, MOS Food Services could be a candidate for an MBO. A US activist shareholder hedge fund, Steel Partners, already has a stake. Steel Partners launched a hostile bid to buy Japan’s Myojo Foods, where it was a major shareholder, but was thwarted by Nissin Food Products, the largest Japanese instant noodle maker.

Thai Beverage Public Company Limited

• Headquarters: Bangkok, Thailand

• Annual Sales: 92 bn baht (US$2.7 bn)

• Market Cap: 6 bn baht (US$175m)

Why a target: Thai Beverage is listed in Singapore but is a leading producer and seller of beer and spirits in Thailand, with approximately 60% of the beer market there. The stock has been depressed since the New Year’s bombings in Thailand and general political turmoil. But the company is well run, and is in the first stages of a regional expansion plan. Despite the softness in the Thai market, it has maintained its margins on earnings before interest, tax, depreciation, and amortization (EBITDA) at above 30%.

Who’s rumored to buy: Despite Thailand’s post-Thaksin traumas, it remains a garden spot destination and the market has proved resilient. Thai Beverage is an attractive target for international beverage players such as Anheuser Busch and SabMiller, both of the US, or Japan’s Kirin, seeking a springboard in Southeast Asia.


• Headquarters: Hong Kong, China

• Annual sales: 3.9 bn renminbi (US$502m)

• Market Cap: 8.4 bn renminbi (US$1.1 bn)

Why a target: Wumart has a dominant position in the north of China . A Citigroup analyst dubbed the stock risky following a recent scandal and noted that Wumart faced uncertainties in its ability to close its acquisition of the Jiangsu Times, a media property, making its growth strategy uncertain.

Who’s rumored to buy: Although weakened by the scandals, the company remains a highly attractive platform for a one-step entry into north China by big overseas retailers.


Daewoo Shipbuilding & Marine Engineering Co., Ltd

• Headquarters: Seoul, South Korea

• Revenues: 5 trn won (US$5.3 bn)

• Market Cap: 5.2 trn won (US$5.5 bn)

Why a target: Daewoo Shipping is the world’s second-largest shipbuilding company, with a 2.5m ton or 40 vessels production capacity in commercial vessels per year. The Korean government will put the 50% it owns up for sale in 2007. Daewoo has a solid market position and potential for growth.

Who’s rumored to buy: Potential bidders are domestic conglomerate GS Group, transportation company STX Group, Doosan Heavy Industries, Samsung Heavy Industries, and steel maker POSCO.


• Headquarters: Singapore

• Revenues: S$59m (US$38.1m)

• Market Cap: S$20.6m (US$13.4m)

Why a target: A Singapore-listed specialty chemicals manufacturer, Megachem has a wide distribution network in Asia and Europe. The company is highly diversified, selling some 800 different products to multinational customers, and can withstand cyclical downturns in individual sectors. Its earnings suffered last year due to lower demand in Singapore and Malaysia, but it was able to hold gross margins stable despite rising oil prices.

Who’s rumored to buy: Malaysia’s Nylex (see below) already has a 29.9% stake and has stated its intention to acquire the remaining shares for a takeover in the next few years. Other potential bidders include Brenntag of Germany and the Netherlands’ Univar.

Nylex Malaysia

• Headquarters: Shah Alam, Malaysia

• Revenues: 70m ringgit (US$20m)

• Market Cap: 318m ringgit (US$90.9m)

Why a target: Nylex is the industrial chemical arm of Ancom Berhad, Malaysia’s largest agricultural chemical company. Ancom is looking to consolidate its subsidiaries to boost its overseas profile.

Who’s rumored to buy: The company is actively seeking takeover offers. So far, it has attracted high-profile bidders such as Singapore-listed Noble Group, and has begun talks with Singapore-based Olam International and Brenntag in Germany.


• Headquarters: Pohang, South Korea

• Revenues: 26 trn won (US$27.7 bn)

• Market Cap: 25.5 trn won (US$ 27.1 bn)

Why a target: POSCO enjoys steady, lucrative cashflow, and its sales revenues are growing 9% annually. It’s also big: the company’s steel production accounts for 60% of the total in South Korea, and it has a strong presence in other parts of Asia. In the rapidly consolidating global steel industry, all of this makes POSCO a desirable prize. POSCO also has a fragmented ownership structure — no major shareholder owns more than 5% — making a takeover easier.

Who’s rumored to buy: Potential bidders are London-based Arcelor Mittal and Japanese steel makers Nippon Steel and JFE Holdings.

WTK Holdings

• Headquarters: Kuala Lumpur, Malaysia

• Revenues: 613m ringgit (US$175m)

• Market Cap: 1.4 bn ringgit (US$400m)

Why a target: A Malaysia-listed manufacturer of timber, plywood, and packaging that is keen to dispose of its non-core assets.

Who’s rumored to buy: Potential buyers include Malaysian-listed timber rivals Rimbunan Hijau and Subur Tiasa.


Jurong Technologies

• Headquarters: Singapore

• Revenues: S$1.9 bn (US$1.2 bn)

• Market Cap: S$513m (US$334m)

Why a target: Could be a good turnaround story. This technology company saw its stock decline last year when two of the companies it supplied with components for hard-disk drive production, Seagate and Maxtor, merged. Yet the company has scored higher profits despite declining sales, showing resiliency by boosting sales of wireless products. Local analysts have recently upped the target price of the stock as a result.

Who’s rumored to buy: Top, Asian-based electronics contract manufacturers such as Hon Hai Precision in Taiwan or Flextronics in Singapore.


• Headquarters: Shenzhen, China

• Sales: 529m renminbi (US$68m)

• Market Cap: 1.8 bn renminbi (US$232m)

Why a target: The company has a great network in China and growth potential in providing software enterprise solutions for small- and medium-size companies. This is a potentially huge market, making Kingdee a sensible entry play for a major foreign software company.

Who’s rumored to buy: Foreign eight-hundred pound gorillas like Germany’s SAP, and Oracle or Microsoft from the US.

Satyam Computer

• Headquarters: Hyderabad, India

• Revenues: 51 bn rupees (US$1.2 bn)

• Market Cap: 309 bn rupees (US$7 bn)

Why a target: Owner B Rama Raju has said he is willing to sell his 14% stake in Satyam, the fourth-largest IT firm in India. Financial institutions (mainly funds) hold over 50% of the company’s equity. The company is a good target for a foreign company seeking an inroad to the Indian IT services business.

Who’s rumored to buy: Potential buyers are IBM and EDS of the US, or India’s Reliance ADAG.


Korea Express

• Headquarters: Seoul, South Korea

• Revenues: 1.2 trn won (US$1.3 bn)

• Market Cap: 1 trn won (US$1.1 bn)

Why a target: Korea Express has an extensive network in the US, China, Japan, and throughout Southeast Asia. It has strong logistics, container, and parcel delivery service businesses. The company has been under court receivership after it guaranteed the debt of its former affiliate, Dong-ah Construction, which went bust, but has maintained its market leadership in Korea regardless. Korea Express has three major shareholders: Goldman Sachs, with 20.6%, and STX Pan Ocean and Kumho Asiana, each with about 14%. The latter two have been raising their stakes in anticipation of a deal. The estimated transaction value would be more than US$1.1 bn.

Who’s rumored to buy: South Korean logistics companies such as current partial owners STX Pan Ocean and Kumho Asiana, as well as Hanjin. Others include domestic food and retail chains Lotte and CJ.

Li & Fung

• Headquarters: Hong Kong, China

• Revenues: HK$55.6 bn (US$7.1 bn)

• Market Cap: HK$77.5 bn (US$9.9 bn)

Why a target: Asia’s model logistics company, and one of Hong Kong’s true global success stories, Li & Fung was the subject of a Harvard Business School case study due to its careful, nurturing operating model. The company’s managers were among the first in the world to glean the potential of extracting value from supply chains while holding assets to a minimum. As its business has matured, it has become more acquisitive itself, and now owns and runs the Asian operations of Circle-K convenience stores and Toys R Us.

Who’s rumored to buy: Global retailers such as UK-based Tesco, France’s Carrefour, and US-based Walmart looking for ways to capitalize on the Asian growth story and find synergies for their own global businesses. Private equity firms also have a growing interest in this sector.

Neptune Orient Lines

• Headquarters: Singapore

• Revenues: S$7.3 bn (US$4.7 bn)

• Market Cap: S$3.5 bn (US$2.3 bn)

Why a target: The shipping company has strong fundamentals, including an attractive ROE of 34%. For a long time — until a major share buyback in December 2005 — NOL was said to be hoarding cash to buy strategic stakes in several industry peers in Europe and Asia. Recent management changes — including a change of CEO and CFO last year — aroused speculative interest. Now management is rumored to be in talks with major industry players.

Who’s rumored to buy: Potential buyers include Danish shipping giant AP Moller-Maersk, Malaysia’s MISC, and Singapore government-owned PSA International.

Financial Institutions

Bank for Foreign Trade of Vietnam

• Headquarters: Hanoi, Vietnam

Why a target: Expected to launch its IPO in mid-2007, with an expected size of over US$300m. This would provide a good opportunity for investors to make their foothold in Vietnam, which posted an estimated 7.8% GDP growth in 2006.

Who’s rumored to buy: Japan-based Resona Bank. Resona has profited well via a strategy of teaming up with state banks throughout Asia — including deals with the State Bank of India and Korea Exchange Bank — to enable smaller business clients to receive loans in these countries. A stake in this major Vietnamese institution would place it at the center of a high-growth market in urgent need of modernized banking services.

Liu Chong Hing Bank

• Headquarters: Hong Kong, China

• Assets: HK$50 bn (US$6.4 bn)

• Market Cap: HK$9 bn (US$1.2 bn)

Why a target: Liu Chong Hing is the second-smallest bank in Hong Kong, closely held by the Liu family, which owns 45% of the shares. Its share price rose 41% in 2006 amid speculation that major Chinese banks were seeking to buy market share in Hong Kong. A Liu family spokesman denies the family will sell its stake. (It changed its name from Chong Hing Bank on 23 Dec 2006.)

Who’s rumored to buy: Industrial and Commercial Bank of China

Sunny Bank

• Headquarters: Taipei, Taiwan

• Assets: NT$239 bn (US$7.2 bn)

Why a target: Privately held commercial banks in Taiwan like Sunny Bank are attracting attention from both foreign and domestic investors as it becomes harder to obtain new banking licenses in the crowded Taiwan market. With its 95 branches, Sunny Bank represents an easy entry into the commercial banking sector, which is expected to see heavy consolidation this year.

Who’s rumored to buy: Potential buyers include Taiwan’s Cathay Financial and Shin Kong, as they have relatively small exposure to commercial banking. Texas Pacific Group, the US private equity firm, also has Taiwan-based banks on its shopping list.

Wing Lung Bank

• Headquarters: Hong Kong, China

• Assets: HK$74.7 bn (US$9.6 bn)

• Market Cap: HK$21 bn (US$2.7 bn)

Why a target: As in the case of Liu Chong Hing Bank (above) a Chinese institution could use it to gain Hong Kong market share. Taiwanese banks seeking mainland access could, if permitted by regulators, use Wing Lung to find a route around the legal barrier to opening branches in China, via the right of Hong Kong banks to do so.

Who’s rumored to buy: Bank of China and several Taiwanese banks.



• Headquarters: Taipei, Taiwan

• Revenues: NT$15m (US$450,000)

Why a target: As the first Taiwanese pharmaceutical company to sign an exclusive agreement with an overseas pharmaceutical company — Holland’s Crucell — AbGenomics has leveraged this partnership to build an attractive R&D pipeline and technology platform.

Who’s rumored to buy: In addition to AbGenomics’ partner Crucell, other possible bidders include Germany’s Boehringer Ingelheim or US-based Pfizer.


• Headquarters: Bangalore, India

• Revenues: 7.9 bn rupees (US$179m)

• Market Cap: 420 bn rupees (US$9.5 bn)

Why a target: It has strong R&D capabilities in fermentation technology, biotechnology, and drug discovery. The company is the leader in the production of biopharmaceuticals through fermentation, and its newly launched cancer drug BIOMAB EGFR is a major competitor to US-based Merck’s Erbitux, but sells for 40% less. Biocon has been granted the exclusive marketing license for BIOMAB EGFR for Pakistan. As such it would be a pioneer in opening a lucrative door to commerce despite politically volatile relations between India and Pakistan. It is also planning to market the drug in South Asia, Africa, and the Middle East.

Who’s rumored to buy: Major Western drug companies.

Biosensors International Group

• Headquarters: Singapore

• Revenues: S$37.8m (US$24.6m)

• Market Cap: S$806m (US$534m)

Why a target: This maker of drug-eluding stents, used mostly to alleviate heart disease, is an attractive target for US medical device players. The demographics of dozens of ageing nations give this product an attractive profile for years to come. Example: Biosensors recently received approval of its coronary S-Stent for the Japanese market.

Who’s rumored to buy: Johnson & Johnson, the US giant, or any major medical device company involved in the heart stent industry, such as US-based Medtronic and Guidant.


• Headquarters: Tainan, Taiwan

• Revenues: US$41 m (projected 2006)

Why a target: The company’s senior executives have confirmed that this active pharmaceuticals ingredient (API) manufacturer is up for sale. And it’s well-managed: ScinoPharm won an award for entrepreneurial excellence from Frost & Sullivan in 2005.

Who’s rumored to buy: Abbott Laboratories and Alpharma, both acquisitive US pharmaceutical firms.

Source: mergermarket (www.mergermarket.com), CFO Asia, published reports