Last week, the Investment Commission pulled the plug on a NT$46.78 billion (US$1.62 billion) management buyout proposal for the nation’s top passive electronic component maker, Yageo Corp, by Orion Investment Co, a group comprised of the company’s founder Pierre Chen (陳泰銘) and US private equity fund Kohlberg Kravis Roberts & Co (KKR).
The rejection of the deal triggered a sell-off of the firm’s stock, with its price plunging by the 7 percent daily limit for two consecutive trading sessions, ending at NT$11.9 on Friday — its lowest level in 15 months.
The commission turned down the Orion bid citing concerns about high leverage, insufficient transparency and the company’s ability to safeguard the interests of minority shareholders. However, the commission downplayed worries about Orion’s suspected intention to remove Yageo’s listing from the Taiwan Stock Exchange, a move that would wipe NT$27 billion from the market’s value.
The failed Yageo management buyout bears a striking similarity to another unsuccessful buyout bid — five years ago, Advanced Semiconductor Engineering Inc (ASE) chairman Jason Chang (張虔生) teamed up with private equity firm the Carlyle Group in an attempt to buy out the nation’s top chip packager with the plan to delist ASE afterward.
The NT$179.4 billion ASE deal was aborted even before it had a chance to be rejected by government regulators. Unlike Chen, who was determined to forge ahead with the Yageo acquisition, Chang called off his bid after learning that his plan to delist ASE had touched a nerve with financial regulators, meaning there was slim hope of getting the acquisition approved.
These two cases underscore the Financial Supervisory Commission’s (FSC) apparent inability during the past five years to revise the rules regulating mergers and acquisitions to reflect the ever-changing economic climate as overseas funds continue to pour into emerging markets amid the weak economic recovery in the US and the eurozone debt crisis.
In addition to investing in equities, currencies and commodities, overseas fund managers, such as private equity firms, are also exploring possible merger and acquisition deals to better utilize their capital. To reap a higher return from their investments, they overhaul the companies they purchase and then sell them after a period of time for a profit.
In Taiwan, most listed companies are owned by major shareholders and a certain share of individual investors, which is different from how most US and European companies are controlled. The problem is that there are no detailed rules to prevent major shareholders from taking advantage of small shareholders when it comes to management takeovers.
The FSC and the Ministry of Economic Affairs said they were mulling tightening financial regulations relating to mergers and acquisitions, rather than adding new rules to better regulate management buyouts. The FSC is considering increasing the amount of capital that private equity funds are required to have to finance an acquisition to two-thirds of the overall transaction price. In other words, private equity investors would only be allowed to borrow a third of the total amount to finance their acquisitions.
Judging by the ongoing inflow of foreign funds, government agencies need to take action before the next major management buyout deal arises and possibly harms the interests of minority shareholders.
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