Is It Time to Buy at Asia's Half Price Sale?
from Winter 1998
by John R. Engen
For years, the folks at Bowater Inc., a $1.5 billion newsprint manufacturer, had thought about extending their manufacturing reach into Asia. And in late 1996, the Greenville, S.C.-based company, which had been exporting to Asia from its North American mills, got its chance when the Halla Group, one of Korea’s largest conglomerates, proposed a joint venture in Thailand. Over the next six months, Bowater executives made several trips to Seoul and signed a development agreement for the project—a mill that would produce newsprint for Asian markets.
Then, seemingly from nowhere, Asia’s financial crisis hit. Economies ground to a halt throughout the region. Banks began calling loans, and companies across Asia, including Halla and most of Korea’s other heavily leveraged chaebols, fell under pressure to slim down operations and restructure debts.
A vast, diversified company, Halla saw many of its business units forced into bankruptcy. In mid-December, Halla bowed out of the joint venture. That would have been the end if Bowater officials hadn’t rightly concluded that Halla would be forced to liquidate its new Korean mill, and fast. Within a week, Bowater dispatched a three-person team to Seoul. “We knew our relationship with them was very important, and if we wanted to capitalize on it, we had to make our interest known very quickly,” recalls James Dorton, Bowater’s vice president for corporate development and strategy.
Five months later, Bowater agreed to purchase Halla’s Daebul Newsprint Mill for $201 million. Getting the deal done wasn’t easy or pretty. But determined negotiating by management, aided by the experience and influence of the board, enabled Bowater to walk away with the mill for less than two-thirds of what Halla had paid to build it two years earlier. “We’re very pleased, because it’s tough to get into Asia with a majority stake,” says Francis Aguilar, a Bowater director and member of the board’s executive committee.
It hardly seems an opportune time to be investing in Asia. The currency devaluations, bankruptcies, and layoffs that have swept through places like Seoul, Bangkok, and Jakarta over the past 17 months have slashed economic outputs, jobs, and living standards, sparking political unrest. Moreover, few believe the crisis has bottomed out yet. Nonetheless, it presents what Tang Kok Yew, a Hong Kong-based investment banker for UBS Securities, calls a “once-in-a-lifetime opportunity. Practically all over Asia today there’s a big ‘for sale’ sign: ‘Buy choice assets at half price.’”
In response, a growing number of U.S. and European companies—large and not-so-large alike—are seizing upon Asia’s current troubles to better position themselves for the long term in a region that, while home to 40% of the world’s population, has historically been closed to foreign competition. During the first eight months of 1998, U.S. companies announced or completed a record $12.9 billion in Asian mergers and acquisitions—more than double last year’s volume for the same period, according to Dan Schwartz, publisher of M&A Asia, a Hong Kong-based newsletter. Throw in smaller deals that fly under the trackers’ radar screens—U.S. suppliers of internet services have been active acquirers in the region, for instance—and purchases of Asian-owned U.S. properties, and the numbers rise to about half-again that level. And that could be just the beginning. A July survey of multinationals conducted by Renaissance Technomic, a Singapore-based management consulting firm, found that while only about 12% of respondents had purchased Asian assets in the past year, 67% were “actively pursuing acquisitions” in the region.
How much are the acquirers saving? One investment banker estimates that asset values in the hardest-hit parts of Asia have plummeted by an average of 60%. But what really defines this market is the quality of assets that have become available and the potential for companies to position themselves in a region that historically has been tough to crack. Bowater is among an ever-growing number of companies that have made deals that, before the crisis, simply wouldn’t have been possible.
“Frankly, I don’t think Korean companies would have even considered divestiture a year ago,” says Michael Mudler, chief financial officer for Brussels-based Volvo Construction Equipment, a subsidiary of the Swedish auto giant. In February, Volvo Construction agreed to buy a majority stake in Samsung Heavy Industries’ construction equipment business—including its state-of-the-art plant near Pusan, South Korea. “But the financial crisis has changed their thinking.”
Like Halla and Samsung, many of Asia’s big conglomerates are under pressure—from governments, the markets, and their own balance sheets—to shed assets. For American companies with flush balance sheets and market caps still near all-time highs, despite recent turbulence, the timing couldn’t be much better. Already, companies as diverse as Citicorp, GE Capital, and Wal-Mart International have bought out local competitors, with an eye to Asia’s recovery. Coca Cola and Hewlett-Packard are among those who have bought out local joint-venture partners to the same end.
And it’s not just assets in their own backyards that Asian companies are selling. Since the beginning of the year, U.S. banks, high-tech firms, and construction companies, among others, have capitalized on the region’s troubles by buying U.S. subsidiaries of Asian conglomerates. Some of those subsidiaries originally had been earmarked to go public, but the slowdown in the IPO market dashed those hopes.
“We were surprised, but pleased, that it came up so quickly,” says Robert Rogers, chief executive and a director of Texas Industries Inc., of the opportunity to buy Los Angeles-based Riverside Cement from the Korean conglomerate Ssangyong for $120 million in cash. The acquisition, finalized early this year, gives Texas Industries, a $1.2 billion Dallas-based maker of steel and cement, its long-desired foothold on the West Coast. “They needed cash in a discreet, efficient manner to address some domestic demands, and we were able to accommodate them,” Rogers adds.
Since it was done in the States, the Riverside deal was relatively simple to pull off—no foreign languages or terminology, no foreign laws, and U.S.-regulated accounting standards. Texas Industries’ board was even able to visit the plant before the purchase. “It wasn’t difficult to do at all,” Rogers says. But when the acquisition being contemplated is in Asia itself, the complexities and risks are elevated. The cozy relationships between companies and governments common throughout the region can be an anathema to Americans. And subsidiaries of large Asian firms often are burdened with hidden liabilities—typically in the form of cross-guarantees with sister companies.
Conducting the kind of due diligence neccessary for such transactions requires lots of time and money. A good investment bank alone, even for a small deal, can easily cost over $500,000. And if you choose to wing it without Wall Street’s help, lining up lawyers and accountants—an absolute must, in most instances—will cost $250,000, minimum, according to publisher Schwartz.
Especially at smaller companies like Bowater, board members need to ask themselves some questions: Do the potential gains of an Asian acquisition justify the costs? Is management up to the task of buying—and more importantly, running—a company with foreign operations and workers? For many mid-sized companies, buying Asian is not a good idea, no matter how attractive the price. “It’s a very significant exercise for a mid-sized business to understand these markets,” says Stephen Blum, an M&A partner for KPMG Peat Marwick in New York. He tells of one U.S. firm that considered an acquisition, only to conclude that the challenges of managing an Asian operation outweighed the potential rewards.
Blum advises smaller company boards to first build an operation big enough to permit them to “leverage their investment in a distant part of the world. My advice to a board would be, ‘Let’s take a hard look at whether there are opportunities in our own domestic industry which can give us the scale we first need to build a global franchise.’”
For companies interested in pursuing Asian acquisitions, a big question is timing. One top executive, fearing that the market has not yet hit bottom, notes that his company is still waiting for prices to fall further. “Our strategy is: Line up your funds, line up your contacts, and get your infrastructure set so you can swoop in when the time is right,” he says. “I don’t know if that’s six months from now or a year, but I don’t think it’s quite yet.”
Sounds good. But if the region turns around quickly, a positioning opportunity could be lost. This was the talk of a recent Hong Kong M&A conference sponsored by Schwartz’s publication. The conclusion, says Schwartz: If it’s in your long-term plans to expand in Asia—and you have the cash cushion to ride out a possible downturn in the United States and lagging Asian performance—then, “right now is a good time to go after the acquisition of your dreams. Nobody rings a bell at the bottom of the market. Good businesses go on the block when they come up, and if you don’t buy them, your competition will.”
The best advice for directors: Be realistic about the potential downside of a trans-Pacific deal, and be sure to communicate your thinking to shareholders, who might flinch at a short-term earnings hit. Otherwise, the board may find itself defending a decision that, in retrospect, will look ill-timed.
If management is intent on exploiting Asia’s moment of weakness, boards must carefully assess whether a proposed transaction fits with the company’s long-term strategy or is merely an opportunistic grab. Volvo, for instance, had been shopping for an Asian acquisition for years and knew what it was looking for when the Samsung plant emerged for sale. And in Bowater’s case, Asia’s dynamics—high literacy rates, growing populations, and urbanization—all bode well for newsprint consumption. “Even in bad times, people still read newspapers,” says Bowater director Kenneth Curtis, an international attorney and former U.S. ambassador to Canada. “Asia is too big a market to write off for the long term.”
With five North American mills at the end of 1997, Bowater’s management and board has done some strategic soul-searching in recent years. The nine-member board is a good one, boasting top executives from several strong companies, such as Pennzoil Chairman and CEO James Pate and Richard Barth, former chairman and CEO of Ciba-Geigy. In 1995, the board hired Arnold Nemirow, a long-time newsprint industry hand, as CEO. After a first year that had its rocky moments, the directors concluded that Nemirow had the vision to grow the company in a consolidating industry and named him chairman in 1996.
International expansion emerged as a linchpin of that vision. Just after the Halla deal, for instance, Bowater acquired a big Canadian rival, Avenor Inc. But the North American market for newsprint is expected to grow slowly in coming decades, while consumption in Asia and Latin America is likely to accelerate. With an eye to the trend, the company has, in recent years, worked to boost exports to several Asian markets. “If you’re selling newsprint, Asia is where growth is going to be, so you’ve got to get in there,” says Aguilar, who is a professor emeritus at Harvard’s Graduate Business School. “But the markets have historically been so closed that it’s extremely difficult to get a manufacturing platform there.”
This has long been a lament for many U.S. companies, and one that inspired Bowater to embrace Halla’s initial joint venture proposal with such vigor. When Halla took its first stumbles, Bowater’s management grabbed the ball and ran with it.
After the December meetings in Seoul, Dorton’s team returned cautiously optimistic, feeling it had a chance to make a deal that would give it Halla’s mill, one of the largest, most-efficient facilities in the world with an annual capacity of 250,000 metric tons. But Bowater officials knew they would have to move both quickly and astutely—to meet Halla’s own time constraints as well as to keep the sale of the operation from going to auction, which would create a bidding contest with other competitors.
Their first step was to approach Bowater’s largest shareholders and the board, and this is where articulating the long-term strategic plan proved its worth. The shareholders readily acknowledged the medium-term risk of the deal, but being aware of the industry’s dynamics, enthusiastically backed it. And that support reassured directors, who quickly approved pursuing a deal. Having a strategic plan already in place helped. “When this opportunity came along, we didn’t have to go back and figure out if it met the company’s criteria,” notes Curtis.
In most acquisitions, boards bear responsibility for setting broad guidelines but pass off the actual implementation to industry-savvy executives. And that was the case here. “The board set the floor and the ceiling for the acquisition” in terms of price and terms, recalls Curtis. “We gave management the tools it needed. But I don’t think the board has any role whatsoever in getting involved directly in the negotiations.” Aguilar agrees: “You’ve got to have confidence in management, acknowledge that they’re smart, and trust their judgment. We did that here.”
After confirming that Halla was indeed interested in talking, Dorton’s team took a crash course from a consultant in some basics of Korean culture—how to bow, where to sit at a table. “We wanted to do things the Korean way,” Dorton says. They lined up a high-powered team of advisors, including Goldman Sachs as their investment bank and KPMG as their accountant, and set off for Seoul to make a deal.
Although Halla was under time pressure, achieving an agreement proved more contentious than anticipated. The German-built mill was constructed in 1996 for $330 million—a total that equalled the debt still owed on it. Wiping the debt slate clean was key to getting any deal done, but the process was complicated by reluctant creditors, including one Thai bondholder who demanded equity for his debt position. Dorton’s team argued that discounting the debt in exchange for U.S. dollars upfront, at a time when the Korean won was unstable, was a fair trade. The creditors however, were in no mood for such discussions. “This simply isn’t done in Korea,” they said.
Finally, one creditor agreed to the discount, breaking the logjam. A deal, at a price of $175 million, appeared set. Taking their culture lessons seriously, Dorton’s team members spent several celebratory nights in a Seoul karaoke bar with their hosts. “If you have a successful day of negotiations in Korea, you must drink and sing,” Dorton says. “It’s not really optional.” But then, at the last moment, a new bidder—a competitor from Norway—emerged with a better offer. After all the work, it appeared that Bowater wouldn’t get the plant after all. And that, Aguilar says, is where the board’s advisory role truly paid off.
Aguilar, who had studied Korean business practices in numerous academic case studies, suggested that Bowater seek help from U.S. diplomats and the Seoul government. With the help of Goldman, which was aiding the Seoul government structure an emergency bailout, access—and results—came quickly. “Here we had a deal that had been structured, set up, and agreed to, and at the last moment the Korean party was trying to back out,” he recalls.
“In Asia, there are much closer relationships between business and government, and the Korean government was working with the U.S. government on the devaluation of the won,” Aguilar continues. “We figured if we could get the Korean government to disapprove of what the company was doing, they’d back down. And that’s what happened.”
In May, Bowater announced that its board had unanimously approved purchasing the mill for $201 million—$26 million more than before the Norwegians arrived on the scene, but still a steal for a plant that is expected to last 70 years or more. The deal closed in July.
Now, Aguilar and his colleagues are contemplating Bowater’s future as a true multinational and what it means to both the board and the company. Among their first steps: Restoring wages for the mill’s 300 employees to pre-crisis levels to help forge good relations. Later this year, directors plan a trip to check out their latest purchase. “I think it’s important for the board to get comfortable with the deal once it’s done,” Aguilar says.
They also plan to rejigger the board’s composition, adding a Korean director to the mix. “It’s important to bring someone on board with a physical presence there and an understanding of the region,” Aguilar says, adding, “a guy who is plugged into local business networks.”
But the biggest effects should be on the operational side. In addition to boosting Asian sales, the new mill should allow the company’s North American plants—including the six mills acquired in the Avenor deal—to redirect production and capture more market share in the United States and Latin America. Directors also are casting an eye toward another purchase, either in Asia or Brazil.
The Halla deal “makes us bigger,” Aguilar says. “It gives us overseas operating experience, and that should make it easier if we want to make acquisitions in other markets.”
