Over the past five years, financial regulators have been pushing for consolidation of the nation’s fragmented financial industry, but from time to time they have encountered the essential question of whether the government or market forces should play a greater role in achieving this goal. Last week, it seemed the regulators decided to prioritize financial discipline in the sector, rather than speed up the pace of industrial consolidation.
On Thursday, the Financial Supervisory Commission announced a set of stricter regulations for financial holding companies’ investments, especially in cases of hostile takeover bids, which would require companies applying to invest in other financial firms to obtain a controlling stake within 170 days.
The size of the controlling stake will be 25 percent if the targeted firms — such as financial holding companies, banks and brokerages — are listed companies, and 50 percent if the targeted firms are unlisted.
In addition, financial holding companies seeking to invest in other financial firms through mergers and acquisitions (M&A) are required to purchase the controlling stake on the open market in one attempt. If a company fails to acquire that amount of shares on the open market during the required period, it is banned from undertaking another takeover bid for one year.
At first glance, the commission’s new regulations look like a reminder to the financial holding companies that they must prove they have the ability to launch a takeover bid and complete the acquisition within the required period, or they had better not try it at all. The commission said its actions could help achieve effective and healthy M&A activity, while minimizing uncertainties in the market and protecting the interests of shareholders.
Nevertheless, the commission’s new stance is likely to decrease the chances of hostile takeover bids being launched in a market where mergers among financial firms remain a sensitive issue and many people still view hostile takeovers as brash US-style capitalism.
It also represents a setback from a relaxed policy launched in 2005, when the commission lowered the acquisition threshold from a 25 percent stake to 5 percent in a bid to facilitate the then Democratic Progressive Party government’s financial reform goal of halving the number of financial holding companies by the end of 2006.
That relaxation did not work well. Instead, it led to several controversial deals, such as China Development Financial Holding’s drawn-out hostile takeover bid for Taiwan International Securities, Chinatrust Financial Holding’s dubious investment in larger rival Mega Financial Holding and the dilemma of Taishin Financial Holding’s investment in Chang Hwa Commercial Bank.
Clearly, the commission wants to protect the domestic market from the impacts of imprudent financial practices because the financial sector cannot afford to have any more unsettled M&A disputes, and the public would not tolerate it happening again. The previous target of slashing the number of financial holding companies by half no longer exists for sure, and the commission’s latest move shows it learned from the experience that it needs to promote healthy takeover activity in this sector.
However, the commission’s new administrative restraints appear to send a message to the market that it has become more cautious about letting market forces shape the sector. To some extent, this might affect the pace of consolidation in a sector where, ironically, consolidation is what is needed the most.
Perhaps, after re-instituting some much-needed discipline in the financial sector, the commission should ask itself whether it has offered enough incentives to facilitate industrial consolidation, or has imposed too many constraints. Taiwan has much to lose from excessive government intervention.
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