As Crisis Deepens, U.S. and European Firms Move In : West Snaps Up Asian Businesses 
International Herald Tribune
June 20, 1998
Michael Richardson 

As East Asia's financial and economic crisis deepens, Western companies are buying Asian businesses at a record rate to increase their strategic presence in the region and outflank rivals, especially from Japan, executives and analysts say.

"The aggressive maneuvering by European and American firms in Japan's own backyard could put Japan at a competitive disadvantage for years to come," said Robert Broadfoot, managing director of Political and Economic Risk Consultancy Ltd. in Hong Kong. "It will also increase pressure on Japanese firms to enter into alliances with either Americans or Europeans."

Since the financial crisis in East Asia began almost a year ago, Western firms — led by U.S. and European corporations — have spent tens of billions of dollars to snap up Asian assets forced onto the market and made much cheaper by the economic slowdown and the plunge in local currency values.

Executives involved say that they expect the Western buying to surge further over the next few years, despite fears being expressed by some Asian officials about loss of control over their economies.

"It's an extraordinary opportunity for American and European companies to make acquisitions in Asia," said Daniel Schwartz, the publisher of the Asian Venture Capital Journal, which is based in Hong Kong.

"In the United States and Europe, you have enormous amounts of capital and liquidity. In Asia, there's a capital shortage that borders on insolvency for some countries and many local companies. Asian share prices are way down and some stocks are just a fraction of what they were before the crisis hit."

Mr. Schwartz said that in the first four and half months of 1998, his company had tracked 479 merger and acquisition deals in Asia worth more than $35 billion. Those figures are well ahead of the 711 such deals worth nearly $59 billion for the whole of 1997 and 627 deals worth $45 billion in 1996.

He said that the buying was dominated by multinational corporations, banks and money managers mainly from the United States and Europe, but also from some cash-rich companies in Australia, Singapore, Taiwan and Hong Kong.

"No matter how bad it is over here, this is a part of the world you can't ignore," said Michael Koeneke, chairman of Global Mergers and Acquisitions for Merrill Lynch securities. "If you do not have a position in the Asia-Pacific region, you're behind the curve."

He said that there was "a high degree" of interest in Asia from potential Western buyers, although many were waiting for prices to fall further.

Leveraged buyout funds were holding $70 billion to $80 billion in the United States that could be invested in Asia if markets there fall to even more attractive levels, Mr. Koeneke said, while buyout funds in Europe have $30 billion that could also be deployed in Asia. The actual amounts invested could be five or six times greater if these cash war chests were leveraged with borrowed money, he added.

The fight for corporate advantage in Asia is a part of a global competitive fight that is intensifying in many key industries.

Of the three groups of companies — American, Japanese and European — that are most prominent in the struggle, analysts said that the Japanese are now in the underdog position in Asia because of the weakness of their economy, banking system and currency. As a result, Japan risks losing its previous commercial dominance in Asia.

Concern that Asians will lose control of their economic destiny has already been voiced by officials and other critics of foreign takeovers in a number of East Asian countries, including Malaysia, Thailand and South Korea. This nationalist backlash is likely to grow louder and stronger as the region's economic pain increases in the months ahead.

On Friday, Prime Minister Mahathir bin Mohamad warned of attempts by foreign "robbers" to take over major Malaysian companies.

The remark echoed comments he made recently in Tokyo, when he warned that the takeover of devalued assets in East Asia by global conglomerates threatened the independence of the region's governments, creating a new form of colonial exploitation similar to that of U.S.-controlled "banana republics" in Latin America in the past.

But Christopher Clarke, vice president and managing director for Southeast Asia for the management consultants A.T. Kearney, said that Asian businesses that end up in the hands of multinational owners would still benefit Asian economies by "creating further growth and bringing in world-class brands and technology."

Other Western executives said that they were searching for joint ventures and partnerships in Asia that could help revive ailing local companies and benefit both sides.

Still, many East Asian firms are being forced by the economic crisis to sell loss-making and noncore assets to pay off loans and stay in business, while debt-laden banks, finance companies and securities houses are seeking large injections of foreign money to stay afloat.

For example, South Korea's heavily indebted Hanwha Energy Co. Ltd. recently sold its power generation business to AES Corp of the United States for $874 million; Thailand's largest company, the Charoen Pokphand group, sold a 75 percent stake in its Lotus supermarket chain to the British supermarket giant Tesco PLC for £200 million ($320 million) and Merrill Lynch said it would pay up to $68 million to take majority control of Phatra Securities Co., one of Thailand's largest brokerage firms, in a bet on the eventual turnaround of the battered Thai stock market.

Commerzbank AG of Germany announced this month that it would invest $250 million to buy 30 percent of Korea Exchange Bank in South Korea. Earlier this year, two of Thailand's largest banks, Bangkok Bank Ltd. and Thai Farmers Bank Ltd., raised about $2 billion between them in private sales to foreign institutional investors.

As much as half of Thailand's banking system will fall into the hands of large foreign banks, said Aswin Kongsiri, chairman of the board of executive directors at Bangkok Bank of Commerce.

East Asian governments, under pressure to cut costs and raise revenues, are having to divest substantial stakes in state-owned and state-controlled industries to overseas interests to gain access to extra cash, management expertise, technology and new markets.

Indonesia this month named nine investment banks to manage the sale of substantial stakes in 12 state-controlled companies spanning telecommunications, cement, steel, airports, mining, toll roads and plantations.

"The dilemma is to raise the maximum amount of money while giving away the least amount of management control," said Bruce Rolph, head of research at Bahana Securities in Jakarta. Bahana is one of two state-owned securities firms advising the Indonesian government on the privatizations.

Analysts said that potential American buyers included Lockheed Martin Corp., GE Capital Corp., AT&T Corp. and American International Group Inc.

"Most of these companies are taking a longer-term view of the region," Mr. Broadfoot said. "They know Asia remains attractive in the medium term as a market and that the crisis has helped to lower barriers to entry of foreign firms. Moreover, the currency adjustments that have taken place since mid-1997 have greatly enhanced Asia's competitiveness as an export production site."

Countries hit hardest by the crisis, including Thailand, Indonesia, South Korea, Malaysia and the Philippines, are relaxing restrictions on foreign ownership in areas including financial services, property and retailing where outsiders were previously barred or tightly controlled.

While the plunge in the value of nearly all Asian currencies against the dollar and major European units makes Asian acquisitions relatively cheap for American and European buyers, Western executives caution that heavy debts, lax accounting and inadequate bankruptcy regulations make many Asian firms that are seeking buyers or joint venture partners a much riskier proposition than they might initially seem.

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