Large companies often launch mergers and acquisitions (M&A) to increase market share when demand recovers from a downturn, taking advantage of the weakness of smaller rivals.
However, a NT$46.78 billion (US$1.61 billion) buy-out bid offered by Yageo Corp chief executive Pierre Chen (陳泰銘) and KKR & Co has unsettled shareholders.
Such an offer would be unexceptional in the US and other developed economies, but in Taiwan it has immediately drawn criticism, loopholes in M&A regulations that allow major shareholders to maximize their own profits being an issue of particular concern.
The Financial Supervisory Commission and the Ministry of Economic Affairs said that everything had been above board to date and all they could do was keep an eye on future developments.
Apparently no progress has been made since Carlyle Group sought to buy out the world’s No. 1 chip packager Advanced Semiconductor Engineering (ASE) in cooperation with the company’s chairman Jason Chang (張虔生) four years ago. Carlyle eventually withdrew its offer.
Since the announcement of the bid to take over Yageo, worries have been voiced as to how the price was decided and why de-listing is the best move for Yageo Corp, especially when efforts by management to boost profits are starting to bear fruit.
The company recently posted its strongest gross margin in the past decade, 28.7 percent in the third quarter of last year, a performance that beats many of the Taiwanese electronics firms traded on the main bourse.
The acquisition will turn Yageo, the nation’s biggest passive component maker, into a privately held company and result in its de-listing from the TAIEX once Orion Investment Co, a venture company created by Chen and KKR obtains a 50 percent stake in Yageo. As KKR and Chen currently own more than a 34 percent stake in Yageo, passing the 50 percent threshold should not be difficult.
It would be even easier to push through the proposal at the annual general meeting, as management needs only to secure 50 percent of proxy votes from shareholders. Individual shareholders in Yageo are likely to be forced to accept an offer of NT$16.1 per share.
Yageo’s board backed the bid after a special task force was created to oversee the matter and KMPG International Corp and China Intangible Asset Appraisement Co were hired to review the offer.
Yago said the NT$16.1 per share was higher than the company’s stock price has been for seven years and that the valuation of the company at 11 times earnings was also reasonable.
Chen told a media briefing that the deal would help Yageo grow by enabling it to operate in new markets and leveraging its strategic partnership with KKR, but he did not explain why such growth could only be achieved by de-listing or removing regulatory scrutiny.
Individual shareholders cannot overturn a decision made by the company’s major shareholders, Chen and KKR. Their only hope now is that the government decides it should oversee the deal.
More importantly, the Yageo case will not be the last private fund takeover bid for a Taiwanese company, especially with more overseas funds flowing into Asia and emerging markets in search of higher returns on investment.
In light of this, the government needs to tighten M&A regulations to ensure the interests of individual shareholders are properly protected.
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