"A Regulator's View of Developments in M&A and the Financial Markets"
Keynote Speech by Ms Yeo Lian Sim, Deputy Managing Director, at the 2001 Asia M&A Forum, Raffles Hotel
Date: 5 Oct 2001
1 Good afternoon. Thank you for inviting me to speak at this forum. I understand you have spent 2 days in gaining a deeper understanding of M&A opportunities in Asia. My brief is to outline a regulator's view of the changing landscape of corporate restructuring, mergers, acquisitions and divestments, in the context of financial markets.
Current waves: M&A, globalisation etc.
2 Financial markets have seen different waves of M&As over the years. We had conglomerate M&As in the 1960s and 70s, when the prevailing notion was 'big is beautiful'. During the 80s, leveraged and management buyouts grew hand-in-hand with junk bonds - RJR Nabisco being a high profile example of such a LBO. Strategic M&As dominated the 90s and established new business models or even redefined whole industries. Notable examples include the mergers of AOL-Time Warner and Citicorp-Travelers.
3 While M&As are not new, their nature and the underlying reasons for them have evolved substantially since the 60s. In recent years, cross-border M&A activity has risen significantly. Even in Asia, the value of cross-border deals done in Indonesia, Korea, Malaysia and Thailand multiplied six-fold from US$3 billion to US$18 billion between 1996 and 2000. This is despite the difficulties in transcending national boundaries as well as different legal and regulatory frameworks. National sensitivities have long been an obstacle to cross-border deals. But the recent success of high profile cross-border take-over bids, such as those by Vodafone for Mannesmann and SingTel for Optus, suggest that governments are also acutely aware of the economic realities.
4 Intense competitive pressures in the global market have forced the complex cross-border M&As in order to enter new markets and achieve critical mass quickly - organic growth is simply not fast enough. Even so-called public institutions have turned to M&As to achieve greater efficiency and compete globally. Exchanges, which were and are key components of national infrastructure, have had to re-examine their strategies to remain competitive and stay relevant. For instance, Euronext was created last September by merging the exchanges in Amsterdam, Brussels and Paris. The advent of the Euro has provided fresh impetus to create a more fully 'common' European market.
Developments in Asia
5 The 1997 financial crisis precipitated corporate restructuring in Asia. Divestment of non-core businesses and regrouping of surviving businesses has underscored a large part of M&A activity. The crisis also led governments to review economic strategy, even where there were no excesses to be unwound.
6 Singapore's small and open economy felt, quite acutely, the tremors of technology-led globalisation. Thus, we must ride the waves and lower barriers to competition. In banking, 4 Qualifying Full Bank licenses were allocated in 1999 and more will come this year, allowing foreign banks further inroads into an already open market. In stockbroking, foreign companies have gained access in steps and the pace of liberalisation was accelerated along the way in 1999. The stock and futures exchanges were merged and listed, and the new Exchange exposed to the full force of competition for the investor dollar. This year we saw the result of liberalization: a spate of high-profile domestic and regional M&A deals. 5 local banks have become 3. Similar trends and activity are being seen in other Asian countries.
7 M&A activity must surely be accompanied by growth in the breadth and depth of the Asian financial sector. I believe exciting times lie ahead in Asian markets.
Importance of credit
8 The Asian crisis prompted international investors to reassess the credits of Asian borrowers. Many Asian companies, previously the darlings of global investors, have seen their credit ratings diminish and with it their access to international capital markets. This set the stage for two separate developments:
Debt Capital Market
9 The growth rates of pre-crisis Asian economies enabled companies in the region to obtain capital easily and cheaply from the equity capital markets and from commercial banks. As such capital grew scarcer, debt capital markets emerged as an alternative source of funding. This is timely. Asian corporations have been denied Commercial Paper and Long Term Bonds used by their US and European counterparts. But Asian debt markets are now growing, beginning with Government securities as the foundation. To illustrate the growth potential for Asian debt markets, I refer you to what we have done in Singapore.
- The Singapore Government Securities (SGS) market has grown tremendously since 1997. Total outstanding bonds more than doubled from S$21.9 billion at the end of 1997 to S$50.5 billion at the end of September 2001.
- Bond maturities have gone from 5 years to 15 years. This extends the SGS yield curve and facilitates issuance of similar bonds by corporates to meet long term funding needs.
- An active repo market, a successful 3-month swap contract and a growing 5-year bond futures contract complement outright trading. Corporate bond issues exceed their government counterpart. In bumper activity this year, OCBC issued S$3.9 billion and DBS S$1.3 billion, in quick succession, the last through book building. I would say, "We've arrived."
10 All this from a government traditionally in surplus. Many Asian governments have low fiscal deficits, but that need not impede the growth of Government bond markets. Their development would in turn contribute to a more vibrant corporate debt market. This bodes well for companies engaging in M&As in the region. Debt markets have typically been one of the more important sources of funds for M&A activity in developed markets. The pieces are gradually falling in place for them to play a more prominent role in the Asian context.
Credit and Currency Risk Management
11 Credit quality has taken center stage since the Asian crisis. Lenders are examining credit risk exposures with an almost religious fervour. Due diligence in scrutinising credit quality is no longer just an issue of compliance, but increasingly a trait that distinguishes winners. I believe that this trend will fuel an appetite for instruments to manage credit exposures. Such a development will have a positive impact on both the credit derivatives market, as well as securitisation activity in Asia.
12 Many institutions see the need to build up skills in credit management and several banks already have in-house experts in credit structuring. We need market liquidity to allow companies to better manage credit risk that arises in the course of business, and to decide whether to acquire or divest specific credit exposure sustained by dealing with customers and suppliers. This will also be useful for the larger one-off deals in buying and selling companies.
13 An additional complication arises in cross-border M&A deals - exchange rate risk. This will increase the demand for currency derivatives, as the parties involved will look to manage their exchange rate exposures with the most sophisticated and bespoke instruments. Not a difficulty, as Singapore has been a leading forex centre for decades. Upskill in foreign exchange will be easy.
14 As I have demonstrated, Asian financial markets are developing to accommodate Asian corporate activity. Debt capital, credit derivatives and foreign exchange solutions extend existing capabilities. Soon, there will be no necessity to resort to the Euro markets or US shores, except to 'round-off' investor or issuer portfolios. Specialists in these activities will live indistinguishably alongside their customers here.
Legal and regulatory framework
15 The link between M&A activity and the financial markets demonstrate their symbiotic relationship. As corporate funding and risk management needs increase in complexity, so too will the sophistication of financial markets. Asian financial markets can only develop to meet the needs of the corporate sector where sound and transparent legal and regulatory infrastructures are in place, so as to provide clarity and instill confidence in local financial markets.
16 Institutional investors emphasize the importance of transparent accounting and sound corporate governance. Transparency and disclosure allow expeditious execution, efficient assessment of risk and effective due diligence in M&A.
17 In Singapore, a private sector-led Corporate Governance Committee issued a Code of Corporate Governance earlier this year. This Code provides guidance on Board composition, the roles and memberships of various Board Committees and performance evaluation. All companies listed on the Singapore Exchange will be required to state, in their Annual Reports, their corporate governance practices and to explain deviations from the Code, where they occur. Another private sector-led Disclosure and Accounting Standards Committee is examining issues like accounting standards and disclosure requirements with a view to enhance corporate disclosure.
18 Today, the Securities and Futures Bill is being debated in Parliament and will become law. Among other things, this Bill aims to facilitate the development of a disclosure-based regime, using a new prospectus registration regime, and to make continuous disclosure of material information by listed companies a statutory requirement.
19 Singapore is not alone in these efforts. Other Asian regulators have also been working on enhanced corporate governance, accounting standards and corporate laws reforms. Korea formed a Committee on Improvement of Corporate Governance in February 1999 to study and align Korea's corporate governance practices with international standards. In Malaysia, the Finance Committee on Corporate Governance issued a report on recommended corporate governance practices in February 1999.
20 As individual Asian countries raise standards to global best practice, we will have a better basis for cross border activity. There will not be a 'single European passport'. However, converging standards of corporate governance and transparency will allow more room for regulatory harmonization. An easier step might be to recognize mutually that laws, regulations, standards and practices in one jurisdiction are good enough to be acceptable in the other.
22 As an aside, I would like to mention recent developments in the regulation of M&As in Singapore. The Code on Takeover and Mergers is currently being reviewed. Several significant changes, including allowing partial offers, have been implemented. Partial offers for more than 50% but less than 100% of a company can now be made if they are approved by shareholders of the company who are independent of the offeror. Other amendments proposed after public consultation include raising the threshold for mandatory offers from 25% to 30% to give businesses more options in pursuing alliances instead of outright acquisitions. The new rules will provide greater flexibility for M&As in Singapore, recognising the importance of making our companies efficient and competitive in a more challenging global arena.
23 Shareholders and management must decide if M&A is truly the best strategy for their companies considering the broad corporate strategies and increasing global competition. The regulators cannot decide on their behalf. In essence, regulators only provide the framework and infrastructure.
24 In Singapore, the bond financing markets and the forex management skills are 'in place', with credit derivatives coming along. Standards of corporate governance and transparency have been upgraded to global best practice. What we now need are the professional advisors, with skills to identify business opportunities and who understand the unwritten rules of engagement in different markets to 'get the business done'. This sounds an altogether more exciting proposition.
25 Thank you.