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Global M & A Mania Hits Taiwan

Path to Paradise or Ticket to Hell?


The global merger and acquisition fever is accelerating in Taiwan, with M&A values up six-fold from 2004. What’s behind the flurry of activity in recent years, and who are the players behind the scenes?



Path to Paradise or Ticket to Hell?

By Jimmy Hsiung, Hsiang-yi Chang
From CommonWealth Magazine (vol. 387 )

Buying, selling, domestic or international; merger and acquisition talk is without a doubt among the hottest topics of conversation within the business community this year.

Hostile M&A, Both Sides Lose

Acquisitions don't always pan out. In two instances of hostile takeovers this year - Powerchip Semiconductor's acquisition of Macronix and Yageo's acquisition of Ta-I Technology - all parties involved were damaged. But when your company gets put in the shopping cart and you're not interested in selling, what can you do? Then there are those acquisitions that appear to be successful but eventually come to a bad end, the most distressing example of which would be the failure of BenQ's acquisition of Siemens' mobile unit.

During a recent CommonWealth Magazine forum, Robert F. Bruner, dean of the Darden School of Business at the University of Virginia and America's leading academic authority on M&A, used the "heaven and hell" analogy to describe the challenges facing companies involved in M&A actions.

According to statistics from Bloomberg Business News, the annual value of acquisitions transacted in the Taiwan area have risen more than six-fold in two short years, from less than NT$20 billion in 2004 (Table 1). Meanwhile, the value and number of M&A transactions worldwide continued to post growth during the same period (Table 2), with the number of transnational acquisitions continuing to set historic highs. Why has there been a surge of M&A activity in Taiwan this year? What forces are moving into Taiwan, and what will that mean down the road?

To compete in a globalized economy, M&A has now become one of the growth tools Taiwanese companies need to master. But just four or five years ago things could get ugly when Taiwanese business owners were approached with buyout offers, says Chao Kun-cheng, a vice president with the Taiwan office of international accounting firm Deloitte & Touche with more than 20 years of handling M&A business..

With Taiwanese business owners generally intimately connected with all those involved in the operation and management of their companies, most people tended to believe that selling or delisting their companies "indicates poor management and a loss of face," says Chao, "but they are becoming far more receptive."

External Management is Leverage

"Acquisitions are just a form of external management that increases bargaining power," says Yangtze Associates chairman Tze-Kaing Yang.Mergers and acquisitions are an additional management tool of negotiating leverage. Acer's acquisition of US-based Gateway makes it the world's third-largest computer supplier.

Along the chain of production, where middle and upstream suppliers hold a virtual monopoly relative to scattered downstream companies, the downstream companies are compelled to pursue acquisitions as a means of integrating the production chain to secure bargaining power parity, reduce costs and boost profitability.

"The key Korean competitors to Taiwanese technology exports, like Samsung Electronics and LG Electronics, have recently been aggressively pursuing transnational acquisitions to gain distribution channels and market share," says Jeffrey Glavan, managing director and head of technology investment banking, Asia ex-Japan, at Lehman Brothers. "Taiwanese companies need to start considering how long it will take to achieve the same effect relying solely on the growth of their existing organization."

But according to Powerchip chairman Frank Huang, something that is unmovable by money is cultural power. In South Korea, as in Japan, it can be difficult to arrange a private takeover as a result.

"Particularly in South Korea, unless there's been some kind of financial problem [with the target company], they'll almost never sell to foreigners," Huang says. In the past two or three years a fair amount of foreign money has flowed into Korean and Japanese companies; however, while buying into a company is one thing, actually negotiating an acquisition is exceptionally rare, Huang adds.

From his office in Hong Kong, Banfield keeps a watchful eye on all ongoing and budding acquisitions across dozens of Asian industries. For the really big acquisition cases, there may be 10 or more top-notch investment banks all vying for the position of lead advisor.

From this perspective, Taiwan appears positively nimble and responsive relative to Japan and South Korea, Huang says. "Taiwan is more open," he says, of course excluding the government, he jests.

Restrictions on business investment under Taiwanese law are also a key reason why businesspeople consider using mergers as means to "de-list and cash out" of the Taiwan market.

The government's current 40 percent cap on mainland Chinese investment capital has prompted numerous Taiwanese companies - largely those that have long since moved production offshore - to begin working with investment bankers and foreign companies hoping to cloak themselves in "foreign clothing," transact an acquisition, then move on to develop in Hong Kong or some other area after the subsequent delisting from the Taiwan stock market.

Oaktree Capital's recent acquisition of Fu Sheng or the Carlyle Group's earlier acquisition of Advanced Semiconductor Engineering and other such deals actually betray such considerations, says an Asia-Pacific executive director for one foreign investment bank.

"If the relevant government policies are not relaxed, Taiwan's equities markets could see a lot of companies starting to disappear one after the other," he says.

Private Equity Hordes at the Gates

The wave of corporate M&A activity is in its nascent stages, with companies not only engaging investment companies to monitor long-term prospective acquisition targets but plenty of investment bankers taking the initiative and knocking on doors. Competition is fierce in the M&A realm.

For Colin Banfield, director of M&A for Lehman Brothers Asia-Pacific, it's been a long, busy week. From his office in Hong Kong, Banfield keeps a watchful eye on all ongoing and budding acquisitions across dozens of Asian industries. For the really big acquisition cases, there may be 10 or more top-notch investment banks all vying for the position of lead advisor.

"Right now in the Asia-Pacific region, you could say the private equity funds are lining up the shock troops," Deloitte & Touche's Chao says. The entry of private funds and other new buyers may continue to increase the tide of acquisition proposals, possibly hastening an industry reordering and catalyzing corporate transition, all the while reaping fat profits for the M&A consultants. Total value of M&A transactions in Taiwan for 2006 was nearly NT$130 billion, roughly the same as the annual operating revenue for a major enterprise like UMC or the annual profit of all of Taiwan's small-scale enterprises combined.

Yet companies will not necessarily profit amidst the still nascent stages of the M&A tide; companies may lack a comprehensive post-acquisition reorganization plan or the M&A consultants may be more concerned with their commissions than they are with providing accurate risk assessment. The damage to corporate and shareholder interests wrought by a failed acquisition is easily the equal of the profit reaped when one succeeds.

"One plus one will not necessarily immediately be greater than, or even equal to, two," a former government financial official says. For the buyer, one mistaken acquisition decision could lead to years of losses. At any rate, he says with resignation, whether an acquisition or dismantling actually increases value or creates synergy for the buying or selling companies, the investment bankers and consultants will always be there for their cut. It seems they're the only perennial winners.

Translated from the Chinese by Brian Kennedy