Botched acquisitions: A timely reminder of why the Govt should get out of business

Years before the the disastrous acquisition of Shin Corp by Temasek, Dr Chee Soon Juan had already warned against the Singapore Government’s penchant for mixing politics with trade and commerce.

In his book Your Future, My Faith, Our Freedom, Dr Chee enumerated the foreign acquisitions of Government-Linked Companies and the cost, financial and political, these forays have inflicted on our country. We reproduce the relevant section below.

Not too long ago, however, Mr Lee Kuan Yew accused Dr Chee of working against Singapore’s interests when the SDP leader questioned Singtel’s acquisition of Optus in Australia. With the recent report that Optus stood to face a write-down of up to $8 billion, guess who should be chiding whom?

The trouble is that with the current crop of leaders, the problem looks set to continue, with consequences becoming increasingly dire for Singaporeans.

From Your Future, My Faith, Our Freedom, Chapter 2…

The next logical question is whether political control of the economy has served the country well. Is there any way to assess the PAP’s claim that the government can better compete in the international market than can the citizens? With corporate stars like Singapore Airlines and Port of Singapore Authority making good on the international front, the answer seems obvious. This, however, is a truncation of a wider, and less alluring, account of GLCs.

Consider Micropolis, an American disk-drive manufacturing company that was taken over by Singapore Technologies. Within a year, the computer firm keeled over and sank, dragging down with it $630 million.

And what Singaporean can forget the Suzhou Industrial Park (SIP) disaster? The PAP had set aside US$20 billion to build baby Singapores all over China. This would be an exalted show-and-tell on how to run business the Singapore way.

No sooner had work started in Suzhou, however, that Mr. Lee Kuan Yew ran to the Chinese president, Jiang Zemin, to complain about the ‘municipal shenanigans’ committed by the Suzhou authorities.

It seems their competition was making it difficult for the Singapore side to succeed. When an official in Suzhou responded that ‘In China we have a saying: The mountains are high, the emperor is far away,’ everyone knew that the SIP had breathed its last breath.

More recently the Development Bank of Singapore (DBS), Singapore’s largest bank, dropped a bombshell when it announced that it had lost heavily in acquiring the Thai Danu Bank in 1998. John Olds, DBS’s vice-chairman and chief executive officer (CEO), told everyone the obvious: that the acquisition was an ‘expensive mistake.’ Exactly how expensive was the mistake? The GLC bank said it was raising provisions for its stake in the Thai bank from $241 million to $763.4 million.

In 2001 the bank made another acquisition, this time of Dao Heng Bank of Hong Kong for $10 billion. While it is too early to determine if the purchase has been an astute one, it was clear that investors had lost confidence in DBS’s decision making. The day after the announcement of the acquisition was made, DBS’s stock market value plunged by 10 percent, wiping out $1.83 billion off its market capitalisation.

Then there were the star-crossed acquisitions made by SingTel, the largest GLC by far, first with Cable & Wireless Hong Kong Telecommunications (C&W HKT) and later with Malaysia’s Time Engineering.

Both ventures fell through. The first debacle, with C&W HKT, happened when Richard Li, son of Hong Kong billionaire entrepreneur Li Ka-shing, outmanoeuvred SingTel, run by Lee Hsien Yang, Lee Kuan Yew’s second son. With Time Engineering, the deal went awry when the Malaysian government got cold feet about its flagship telecommunica-tions company venturing into business with SingTel, a Singapore GLC.

Determined not to be stood up at the altar again, SingTel frantically searched for another mate and finally stumbled on Virgin, run by British entrepreneur Richard Branson. The Straits Times, Singapore’s state-controlled morning daily, trumpeted: ‘It was a marriage announcement to beat all marriage announcements.’

Calling Mr. Branson a ‘marketing maestro,’ the Straits Times reported that SingTel and Virgin had come together to sell cellular phones and Internet services. But the devil was in the fine print. It turned out that the US$1 billion deal that gave SingTel a 50 percent stake in Virgin Mobile (Asia) Private Limited, would cost SingTel US$700 million. No wonder they called Branson a marketing maestro.

In 2001, the company was at it again. SingTel was rumoured to be willing to pay $17.5 billion to buy Cable & Wireless Optus, the number-two Australian telecommunications conglomerate.

After the deal was announced, SingTel shares fell by as much as 14 percent, and dragged down the Singapore dollar as well as the composite stock market indicator, the Straits Times Index. Business research houses even threatened to downgrade the company.

A no-win situation for SingTel was shaping up: Either the company coughed up the money for the deal, in which case it ran the risk of suffering an embarrassing loss in investor confidence—or it could refuse, and suffer another unbearable acquisition failure. It was clear that the deal carried more than commercial interest. The reputation of SingTel, indeed of GLCs in general, was at stake.

Singapore Airlines’ (SIA) investment in Air New Zealand also hit turbulence. The New Zealand carrier had suffered financial and operational troubles and as a result saw its share price nose-dive, causing the Singapore carrier to lose nearly $100 million in the process.

The government’s direct investments in businesses world wide through the Government of Singapore Investment Corporation (GIC) has not been spared embarrassment either. Its purchase of 15 million shares in Australia’s Macquarie Corporate Telecom in 2000 at about three dollars a share made it one of the biggest shareholders in the telecom company.

A year later, the Australian company announced that it was haemorrhaging money and its shares tumbled sharply. The GIC was left with millions of the depreciated shares. It sold 14 million of them at 18 cents a share.

…It is important to disabuse ourselves of the notion that the PAP is the visionary architect of Singapore’s economy. The party’s policy-changes just to accommodate foreign investment works at the expense of the people and against the sustainability of progress.

The country has no need of more PAP-directed policies to drag the workforce this way and that in the never-ending search for external capital. Nor should the government involve itself in corporate business.

Quite apart from ideological considerations, there is ample evidence to demonstrate that GLCs have performed dismally in generating appreciable returns on their investments, as well as in fostering innovative production. What the country does need is an overhaul of the present economic paradigm, a fundamental alteration of government-society relations.

The sooner this is realised and attempted, the faster Singapore can get on with the business of constructing an economic strategy based on regard for the well-being of the people, not just the ruling elite. A true economic vision must, perforce, incorporate the values of transparency and democratic accountability, the subject of the next chapter