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Yageo Chairman Pierre Chen

Rewriting the Game Rules for Private Equity Funds

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Pierre Chen leads a multifaceted life, attaining more than single-track business success. In a rare, exclusive interview he talks about Yageo's future, including its unprecedented partnership with a foreign PEF.

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Rewriting the Game Rules for Private Equity Funds

By Jimmy Hsiung
From CommonWealth Magazine (vol. 378 )

He doesn’t command a business empire like Y.C. Wang of Formosa Plastics; he lacks the domineering personality of Hon Hai chairman Terry Gou; he isn’t as learned as TSMC’s Morris Chang or as techno-savvy as Quanta’s Barry Lam.

But Pierre T.M. Chen, CEO of Yageo Corporation – a company that just marked its thirtieth birthday and enjoys modest annual revenues of NT$30 billion – leads a multifaceted life of excitement and interest, not just attaining linear success in business.

Facet One: Corporate Physician

The Yageo Corporation leads most others in Taiwan in its degree of internationalization. Company CEO Pierre T.M. Chen purchased the passive components division of Phillips (now known as Phycomp) in 2000 for US$575.5 million, considered an “astronomical” sum at the time. Becoming the first Taiwanese corporation to acquire a major foreign company, Yageo was immediately confronted by the rapid deceleration of the high-tech sector the following year, putting its back up against the wall in the wake of the acquisition. But the company managed to weather the storm to become a recognized name around the world in parts and components.

This past July, a month prior to the company’s planned gala thirtieth anniversary celebrations, Pierre Chen established another mark for Taiwanese industry. Following a lengthy process of feeling-out and negotiations, Chen, already known for his track record in mergers and acquisitions, took that legacy further by enlisting the well-known private equity firm of KKR (Kohlberg, Gravis, Roberts & Co.) to invest in Yageo. However, bucking the typical pattern in which equity funds clean house and hire new management, Pierre Chen retained operational control over Yageo as part of the deal.

In typical practice, private equity funds normally de-list companies after purchasing them, as the new management team comes in and cleans house. Then, five or six years down the road, after repackaging and re-listing the company, the private equity fund announces its earnings and steps aside.

Pierre Chen’s approach forced veteran US-based private equity fund KKR to start reassessing the value of being the boss. Earlier this year Yageo placed non-secured zero coupon convertible bonds (ECB) with a maturity of seven years with KKR for gross proceeds of US$230 million, making KKR Yageo’s overseas strategic investor. It is anticipated that once the entire sum is converted, KKR, expected to buy 99 percent of the bonds, will become Yageo’s largest foreign capital shareholder with a stake of approximately 16 percent.

Attracting a top-tier international strategic investor through the placement of ECBs, Yageo’s chief executive officer David Huang emphatically asserts that this investment deal has paved the way for an entirely new investment model for Taiwan’s capital market.

Even Mitac chairman Matthew Miao, Chen’s good friend who is often referred to as “Mister Joint Investment,” marvels at his comrade’s ability to convince KKR’s founding trio and a major Wall Street investment bank. “The only way to describe it is ‘highly creative,’” he enthuses.

Rock Hsu, CEO of the Kinpo Group, goes so far as to describe Chen’s skills along the lines of “corporate physician.” Elaborating, he says, “The first person a lot of our colleagues in the business world come to when they run into niggling problems is Pierre!”

Facet Two: Sportsman

Apart from his much-lauded acumen at business operation and consolidation, seen from another angle Pierre Chen, with his crisp flat top and tanned complexion, is quite a sportsman.

He might not have the personal worth to make the Forbes list of the world’s richest men, but his life is enriched by such diverse sporting pursuits as handball, horse riding, skiing and golf.

Known for his low-key demeanor, Chen has only rarely consented to interviews with the financial trade media in recent years, instead showing up frequently at equestrian events.

“I got into two sports after the age of 40 – skiing and equestrianism, mostly to be with my daughters,” relates Chen, whose spirit is even more animated when discussing his two beloved daughters than when talking about the KKR investment deal. With satisfaction in his voice, he says that ever since he began taking part in sporting activities with his daughters, the generation gap disappeared and they never run out of things to talk about.

Facet Three: Art Connoisseur

Beyond discussing his philosophy of business and being a father, the tall and slim Pierre – always a classy dresser – shares the honors with Barry Lam of Quanta as the most sophisticated art connoisseur in the Taiwanese business community.

Compared head to head, Chen is an even savvier art collector than Lam. At the Sotheby’s autumn auction in Hong Kong last year, one of Pierre Chen’s collections-- Tamsui, an oil painting by Japanese-period Taiwanese artist Chen Cheng-po--fetched HK$34.84 million (approximately NT$144 million), setting the latest world record for a “100 million NT dollar” auction purchase of an oil painting by an ethnic Chinese artist.

Chen has put considerable effort into his art collecting. “Before I buy a painting I make sure I do my homework right, and ask for opinions from a lot of artists,” he relates. Only buying what he likes, rather than for investment purposes, he adds, “Deep down inside art and design are my true passions.”

From entrepreneur to art collector, Pierre T.M. Chen evokes not just self-confidence, but the conviction to “do it right” in any endeavor.

Interview with Pierre T.M. Chen


Merger for the Sake of Competitiveness

Interview by Jimmy Hsiung

Q: It’s been a long time since you made an appearance in the media. Would you care to discuss some of the things you’ve observed and learned over the past few years?

A: I’ve been thinking a lot these past few years about what opportunities there are for Yageo over the next five to ten years. With the acquisition of Phillips Passive Components in 2000 we got started on the road to internationalization quite early.

Taiwan has always concentrated on improved manufacturing efficiency. This is Taiwan’s focus and its area of expertise. In fact, this ability is what Taiwan counts on.

No matter what you do these days, as long as you have the ability to raise manufacturing efficiency you can control cost well. Even when margins are poor it is always a good advantage to have.

Q: Please share with us the story of how you brought the private equity firm KKR on board as a strategic overseas investor.

A: Yageo has always been involved in mergers, the real big one being the Phillips deal, from which we accumulated a lot of experience.

We have never positioned Yageo as a regional passive components manufacturer, but as a global passive components maker. That’s why you have to go into the factors behind our purchase of the Phillips division, as we never get involved in mergers and acquisitions merely to raise production capacity.

All our absorptions and mergers are done to improve company competitiveness in three areas. The first is technology, the second is products, and the third is sales channels. We have never done it for production capacity, and even less to pay a company’s premiums for production capacity.

If we positioned ourselves as a regional or Taiwanese leader I don’t think we’d have to do that much preparation.

But when your vision and strategy is to become the global leader, what strategy do you take? That’s why mergers and strategic cooperation are approaches we must adopt for ourselves.

In order to acquire a world-class company you must have a world-class organization yourself in order to be able to assimilate and achieve synergy. There’s no way you can merge a sub-par organization with a world-class one.

Of course, in order to achieve synergy, one must have capital. Capital can be obtained in the form of cash or converted from stocks. So throughout the past few years, we were preparing to issue an ADR [American Depositary Receipt].

Q: And just when you were about ready, KKR came knocking?

A: Someone made an introduction at the right time. Starting last year the Taiwan stock exchange was on the low side, so a lot of private equity funds were interested in working on Taiwanese cases.

Private equity funds should be seen in a more objective light. Capital is capital, whether it’s QFII, hedge funds, or private equity funds. Private equity funds operate by buying you, but how do they buy you? They have to pay a high price, and that’s where they shine. How come they’re willing to pay high prices? Because they spot value others don’t see.

Based on our experience the advantage to private equity funds is their world-class management expertise and capital, which allows you to avail yourself of resources all around the world, and lets you put your company in better order. Naturally they are also quite meticulous and demanding in return. Companies can leverage this power to adjust their makeup.

There are also certain drawbacks, such as ultimately selling you off. Sometimes that doesn’t fit with your own long-range objectives. They are fundamentally unfeeling, but there is really no right or wrong when it comes to this.

Q: It seems that private equity funds rarely stick with the existing management team.

A: Such a stereotypical interpretation isn’t really right. Shareholding determines everything. However, Yageo is a completely new business model for private equity funds, because it is true that no private equity fund has ever not had controlling interest in a company in which they invested. I suppose we’re the first.

Q: What was it about Yageo that made them willing to break that convention?

A: From where I stand, naturally, they spotted several areas. First, we have a world-class base. Second, they believe our business model is correct. And third, they liked our team’s strong execution power.

What’s wrong with having KKR spend their money to help us? At least everything is looking really good at the moment. They not only ask questions but also offer suggestions, even offering how to put them into action. They set a timetable and task people to get to business.

I don’t think that’s a bad thing. It depends on your attitude, really. If you approach it as if they’re coming in to walk all over you, then that’s not a good thing. But I prefer to think that as long as long-term objectives align together, then it’s a lovely win-win match.

Translated from the Chinese by Stan Blewett


Chinese Version: 陳泰銘 改寫私募基金遊戲規則

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