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Temasek's Undue Diligence
Always diligent, Singapore state investment arm has been less than
careful. Laurence Lau. Asia Times
Jun 17, 2006
Kuala Lumpur - Temasek Holdings, Singapore's hugely successful
state-owned investment vehicle, has been characterized as brusque
in its business acquisitions, but seldom sloppy.
Several recent investments, however, raise hard questions about
whether the secretive Temasek is conducting enough due diligence
before entering politically sensitive blockbuster deals across the
region.
To offset its lack of natural resources and a land-limited local
economy, Singapore Inc has gone on a regional investment spree in
recent years, acquiring significant stakes in ports,
telecommunications and banking assets through state-owned
investment vehicles.
Temasek, which was first established to raise capital for
government-linked companies, and whose current executive director,
Ho Ching, is the wife of Prime Minister Lee Hsien Loong, has on
nearly all counts had a successful investment record - apart,
perhaps, from its botched attempts to launch an airline in the
1990s.
But a number of recent apparent lapses have raised hard new
questions about the management of the Singaporean government's
domestic investment arm.
This year Temasek took an 11.55% stake for about US$4 billion in
Standard Chartered Bank, which has substantial Asian operations,
making it the largest single shareholder in the UK-based
bank.
Temasek has demonstrated a seemingly insatiable appetite for
regional bank shares. In the past three years, the investment
company has taken controlling or substantial stakes in Indonesia's
Bank Danamon and Bank Indonesia International, India's ICIC Bank,
Pakistan's NDLC-IFIC, China's Minsheng Bank, the China Construction
Bank, the Bank of China, and Malaysia's Alliance Bank.
A little too aggressive?
But in its acquisitive rush, Temasek has overlooked important legal
and political considerations that threaten to scupper certain deals
as well as invigorate nationalistic opposition to its aggressive
regional investment strategy, known in Singapore as the "Look East"
investment campaign.
That seems particularly true in Malaysia, where Temasek is known to
have numerous holdings in everything from plantations to shopping
malls to banks, but is also viewed suspiciously by nationalistic
groups and politicians.
Temasek is currently a major shareholder in Malaysia Plantations
Bhd, which is the sole owner of Alliance Bank, Malaysia's
ninth-largest financial institution.
Last November, Temasek hurriedly sold about 40 million shares in
Southern Bank Bhd, Malaysia's second-smallest in terms of assets,
after accumulating 16.9 million shares the previous month, which
had pushed its total stake in the financial institution to
7.58%.
The rushed sale was apparently a belated attempt to comply with
Bank Negara regulations, part of the 1989 Banking and Financial
Institutions Act, which require that foreign buyers receive
central-bank approval when taking a stake greater than 5% in a
financial institution licensed in Malaysia.
Temasek also held stakes of more than 5% in two different financial
institutions licensed in Malaysia without prior central-bank
approval.
After the local press highlighted the apparent discrepancy, Temasek
quickly sold off its shares without Bank Negara sanction of what
could have been a costly managerial mistake.
The Standard Chartered deal has also complicated Temasek's standing
in Malaysia, because of the UK-based institution's presence in
Malaysia as a licensed financial institution.
Temasek still controls Alliance Bank through its 15% holding in
Malaysian Plantations, and central-bank regulations bar holding
stakes of more than 5% in two different financial
institutions.
But it is far from clear in Standard Chartered's case whether the
central bank's 5% regulation applies to its licensed Malaysian
operations, ie, whether they are considered "local".
Neither Bank Negara nor Temasek have so far attempted to clear up
the confusion, more than four months after the deal was concluded,
and it's unclear whether Temasek has yet submitted a proposal to
sell down its Malaysian Plantations stake over a specified time
period.
A series of bilateral Singapore-Malaysia spats, ranging from sand
supplies to airspace rights to a contested half-built bridge
linking the two countries, is likely to aggravate Temasek's
Malaysian troubles, which come on top of Bank Negara statements
that it will take stern action against any party that breaches the
rules on foreign investment in banks and financial
institutions.
"Economic imperialism"
This is not the first time that Temasek managers have made mistakes
that in-depth due diligence and a modicum of investment-banking
knowledge seemingly could have avoided.
Temasek's decision to buy a majority stake in Thailand's Shin Corp
from members of Prime Minister Thaksin Shinawatra's family
unleashed a political firestorm that eventually contributed to
Thaksin's decision to step down from power temporarily.
The US$1.9B deal was widely criticised in Bangkok not only for the
tax-free nature of the transaction but, more significant to
Temasek, for the sale of strategic telecommunications concerns to a
Singaporean government-linked entity.
Political protesters cast Temasek's purchase as "economic
imperialism", and a consumer boycott of Shin's mobile-telephone arm
has dented revenues and profits in recent months.
Temasek officials at the time explained that it is not a
government-directed policy agency, and that Temasek makes
investment decisions on strictly commercial grounds.
Until then Singapore Inc had been able to skirt nationalistic
criticism in Thailand, despite making substantial positions in many
formerly Thai-owned banks in the aftermath of the 1997-98 Asian
financial crisis.
More significant were the apparent legal blind spots in the Shin
Corp deal, which some analysts now contend would have been less
controversial if it had been broken up in two or three
phases.
Temasek was forced hurriedly to divest Shin's stake in budget
airline Thai AirAsia because of Thai laws restricting foreign
ownership that they apparently overlooked.
There are still lingering legal questions about the waivers Temasek
received to avoid making a mandatory tender offer for two Shin
subsidiaries, and whether foreign concerns are allowed to own a
majority stake in telecommunications concerns that operate under
government concession.
Temasek's lack of transparency and its general aversion to press
interviews have only added fuel to the fire of the nationalistic
backlash its aggressive investment strategies are starting to cause
across the region.
Citing the above examples, some investment analysts contend that
during Temasek's drive to acquire big stakes in regional strategic
industries, particularly in banks and telecommunications, the
investment company is not effectively gauging through its
due-diligence procedures the possible political and even social
ramifications of its investments.
And that in turn raises important new questions about the quality
of Temasek's previously highly regarded management team. - Asia
Times
(Laurence Lau has more than 18 years of experience in business and
finance. Born in Malaysia, he has worked in Sydney, Singapore, Hong
Kong and Kuala Lumpur. He was head of research for two securities
firms and a portfolio manager for a UK firm.)
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