So who won? Singapore banking turns nasty. Asiamoney, May 2002

SO WHO WON?

 As the dust settles on Singapore’s surprisingly acrimonious bout of banking consolidation, who has come out of the process unscathed and enhanced? Not DBS, with a failed bid and a public relations mess; not really UOB or OUB either, until complex integration issues are resolved. OCBC had the smoothest ride, but its acquisition of Keppel will not transform the bank, and it becomes the smallest of three competitors. No, the unquestioned winners fall into two camps: Singapore itself, with a more sensible banking environment, and the international investment banks who will pick up the fees. By Chris Wright.

After all the bids, counterbids, recriminations and apologies, Singapore’s new-look banking sector has finally found its shape. It’s not quite the two-bank duopoly that Singapore’s government had had in mind, but it is a less crowded market, and it looks like this: UOB/OUB, versus DBS, versus OCBC/Keppel.

The process of getting there provides us with many interesting lessons, not just about the new leaders of Singapore banking, but about the way M&A activity will be conducted in Singapore. And that matters a great deal, because the city-state is going to be one of the key drivers of M&A in this region.

 OCBC: first mover advantage

So who won? If we measure it by ease, by lack of disaster and damage to reputation, the answer is clearly OCBC. The bank’s decision to bid for Keppel Capital Holdings (KCH), spearheaded by CEO Alex Au and CFO Chris Matten, kicked off this whole situation in the first place. It shows the advantages of being the first mover (see box: “What might have been”) since, by setting events in motion, it ended up with no rival bid to contend with, across-the-board acceptance after a modest increase in the bid price, and first shot at tapping the market for funds. Offering an all-cash deal helped.

It also faces less integration issues than any other merger on the table, with some demonstrable synergies. “Keppel has two strong franchises that are really attractive, and they happen to be our weak franchises,” says Matten. OCBC covers the middle to large market, Keppel the small to medium; OCBC’s customers are older, Keppel’s are young and entrepreneurial.

“No integration is easy,” he adds. “There are always people issues to worry about. But it is relatively small and we don’t have too many potential political fights at a senior management level.” It helped, for example, that Keppel Capital only had an acting CEO (ex-Allied Irish man Walter Coakley) – so the top job there, one assumes, was decided automatically, and indeed was officially announced without complaint on August 17. “In our case the thorniest problem is solved before you begin,” says Robin Tomlin, managing director for corporate finance at OCBC’s advisor, UBS Warburg.

But there is a flip side to this assessment: the purchase of Keppel will not transform OCBC. In fact, once all acquisitions are complete, OCBC will be the smallest bank in Singapore. And given that the government has said it envisages a market with two banks rather than three, that suggests it will be vulnerable to takeover itself.

“We’re not hung up on rankings,” says Matten, a touch predictably. “The top three are relatively close to each other in terms of size – we will still be an organization with a S$85 billion (US$48.6 billion) balance sheet, which is pretty substantial.” Others question whether there is ever likely to be another wave of domestic consolidation. “I am a sceptic on whether there can be further consolidation,” says James von Moltke, head of the financial institutions group at Keppel’s advisor, JPMorgan. “It’s hard to envisage a situation where one of these three buys another, because you get into concentration issues. It was never obvious to me how you would get two big institutions out of the five that existed.”

The bank is also likely to acquire again before too long, with expansion in China a likely next step: OCBC has the rare distinction of having stayed open for business through the Cultural Revolution. The bank still has what Matten calls a “very lazy balance sheet” with billions of dollars of latent gains in property that could be put to work. In the meantime the bank has already raised everything it needs to fund the acquisition (see Deal mechanic).

 DBS: an image hangover

What about the others? You can’t help but think that DBS would look a lot better had it never entered the fray in the first place. By doing so, it has come out with terrible image problems and no obvious gain. The bank had already seen its share price take a battering after it offered more than three times book value for Dao Heng earlier this year, albeit in a deal that could create the first truly regional Asia-domiciled bank; the June 22 offer for OUB sent the price lower still.

Analysts had two chief concerns about the OUB bid: the bank’s ability to integrate major acquisitions in two markets simultaneously (although, as DBS president Jackson Tai points out, there was a time when they worked on integrations in three countries simultaneously – POSBank, Thai Danu and Kwong On), and the danger of a share overhang that would be caused by DBS’s mainly stock-based bid.

But in fact, the views of analysts or the financial press were only part of the problem. Far more evident was a grass-roots issue. To international investors, the slick and well-presented pitches of the DBS top brass were impressive, evidence of a bank with global ambitions and smart management. To Singaporeans, it seems, they smacked of arrogance. Terribly ill-advised advertisements run by DBS, depicting DBS as a father and OUB as a child, did not help matters and were swiftly withdrawn. It is said, but has been denied, that OUB founder Lien Ying Chow cried when he heard of the DBS bid; he was certainly upset enough to welcome the rival bid from UOB when it came.

Things were to get much worse when DBS’s advisors, Goldman Sachs, left a presentation that belittled the UOB/OUB proposal with European investors (see box: “Sorry!” ). By the time allegations arose of misleading biographical information about CEO Philippe Paillart on the company’s website – a very insignificant aberration, it must be said – it had become a turkey-shoot.

DBS undoubtedly made mistakes, but to understand fully the scale of this negative response, one has to look to history. DBS is a partly government-owned bank and has local responsibilities, yet at the same time has been trying to transform itself into a regional leader using expensive and experienced expatriate staff with abilities honed at international banks, particularly JPMorgan. At the heart of this ambition is a necessary conflict, and it has never been more amply demonstrated than in DBS’s acquisition in 1998 of POSBank – the Post Office Savings Bank.

More or less everyone in Singapore has a POSBank account. When you do your national service in Singapore, that’s where they pay you. And in taking over POSBank, DBS found itself with armies of customers with about 50 Singapore dollars in their account, doing nothing with it. For a modern bank those sorts of logistics are uneconomical, and so DBS set about downsizing, rationalizing, changing. “If you are trying to run a retail banking business this is probably not the client you want – that’s where you need a post office bank which is run as a national service and not a profit centre,” says Tomlin at UBS Warburg. “That inconsistency in mission wasn’t reconciled: it gave DBS scale but it didn’t deal with this service delivery issue for POSBank clients.”

Locally, it went down very badly. People didn’t like the closure of branches, the loss of personal service. It would appear that a lot of resentment from that process came out when DBS made its offer for OUB. “I don’t think the offer per se was anything exceptional, but there was a lot of residual feeling,” says one observer. “The little guy was feeling that he got screwed on the POSBank account, so this was a very good opportunity to voice his opinions. DBS made a perfectly sensible reaction to the market, they just had no idea of the depth of resentment. Well, they found out!”

On POSBank, Tai is diplomatic. “POSBank is an opportunity for us as well as a challenge,” he says. “Opportunity in that it gave us and gives us a connection with 92% of the population of Singapore. That gives us a wonderful connection to the marketplace. The challenge is that we have purchased what was the people’s bank, and they still have expectations of service quality which we must respond to. In some ways it is public service. But it is public service in the context of our being a commercial organization that has to get higher returns for our shareholders.”

And does Tai think DBS is arrogant? “I think there is always a danger when one makes an unsolicited bid that one comes out looking like the aggressor… and that is the risk we took when we decided it was best to put the offer [for OUB] on the table so that all shareholders could have a say in the matter. We were not making progress in convincing the principals and we decided it was appropriate to have the public at large decide.”

In a free market, there is nothing wrong with Tai’s thinking on that point. But the progress of the bid itself also stood out as unusual. There are very few examples in history of a company launching a bid for a rival, a bid that it knows will not be welcomed and which will almost certainly attract a counter-bid, and yet not being prepared to increase that bid. “In a situation like this you either make your original bid a knock-out or you are prepared to have it countered,” says one banker. It was sufficiently puzzling to generate a persistent, if unlikely, conspiracy theory that DBS had launched its bid knowing full well it wouldn’t win, at the behest of the government, to kick off other bids. (“We did not do this at the direction of the government. We are not doing national service,” says Tai. “This was well prepared on a commercial basis. If this was government-directed, why do we have such a food fight on our hands?”)

Speaking after the official apology but before DBS effectively withdrew from the competition for OUB by allowing its offer to expire, Tai explains the bid process like this. “When one puts out a bid, one has all kinds of other chess moves in mind. One has a playbook, and one should not enter into any bid without a treasure chest of options. We were fully aware of other potential bids and we were fully ready. But one has to look at the bid in the context of the stock price, public sentiment and the economic conditions going forward. Our view was that we were not prepared to get into a bidding contest. We were not going to let personal feelings, emotions or even ambitions cloud our view of what is the right thing to do.” DBS’s share price has risen markedly since it pulled out of the bidding.

DBS will not have enjoyed the last month but its regional scale should not be overlooked. “DBS does have the number one franchise today,” says Steven Sun at UBS Warburg. “In some ways there is strength in the fact that they have already gone through a number of the changes the other banks must now go through.” Although its track record in acquisitions is only average, and although the Dao Heng acquisition has been strongly criticized on price, DBS is still a bold bank with a very strong regional footprint. The fact that it is no longer the largest bank in Singapore is really not a huge issue; more than half of its revenues now come from outside the city state and in the international arena it has a lot to say for itself. “It has been the institutional darling for a while now,” says one banker. “Whereas with all respect to Mr Wee [of UOB] I think he made his first investor presentation ever just a few weeks ago.” But fixing its image at home will take longer.

OUB/UOB

So what of the new domestic leader by size? Well, that’s not straightforward either. The public apology embarrassed DBS, but it didn’t do OUB/UOB any favours either, getting every major criticism of the merger onto the front pages of Singapore’s newspapers. Those criticisms – valuing ‘face’ over shareholder value, creating a board made of friends and family, and the danger of a board so large that it would be impossible to make decisions – do raise questions worthy of discussion.

Most of it is bitchiness, but the point about decision-making is a valid one. The merged group will have co-deputy chairmen and co-presidents, and there aren’t many examples of that going smoothly. It is hard to move policy forward without a clear leader. The two banks face a long process of integration, much harder than OCBC/Keppel and arguably more difficult than DBS/Dao Heng, where there is zero overlap to consider. And as Asiamoney went to press the merger had not reached the 90% level required to allow UOB to delist OUB – absolutely essential to get the best synergies from the bank – although it did look likely that it would do so.

Besides, the mutual adulation that accompanied UOB’s June 29 bid was eye-catching. “I have always had the highest regard for Dr Lien Ying Chow as well as the management and operations of OUB,” said Wee Cho Yaw, group chairman and CEO of UOB. “I welcome UOB’s offer, and believe that it is good for shareholders, customers, employees and good for Singapore,” said OUB group chairman Lee Hee Seng. This affection was more important than it might seem given the level of ownership families had in both banks, with OUB founder Lien Ying Chow committing to accepting the offer for his own 15.7% stake from the outset, alongside two related companies, Overseas Union Enterprise and Overseas Union Insurance. Tellingly, those subsidiary companies felt obliged to issue a statement justifying the speed of their commitment, saying they took “detailed legal advice and carefully considered their fiduciary duties”. They must have worked quickly.

But perhaps we’re too cynical. Unlike OCBC/Keppel, this transforms the bank. According to UOB’s own data, the merger makes the bank a market leader on gross customer loans, domestic personal and corporate loans, total assets, credit cards and market capitalization. The strength of the UOB name is demonstrated by the success of its recent bond issue (see Deal digest). If cost savings can be realized – the offer document cites the figure at S$200 million-250 million per year pre-tax – then this does make for a market leader.

Thanks to the timing of the bid, the principals and advisors involved were unable to comment for this feature, but even those who work for its competitors can find praise for UOB’s approach and success. “I think they have played their cards brilliantly so far,” says Tomlin at UBS. “The resulting bank will be a very powerful combination. A very strong Malaysian franchise particularly, which one shouldn’t ignore.”

In general, Singapore’s banking sector itself will be stronger and more sensible now – five banks was always a crazy number for a place where you can’t drive for more than half an hour without falling into the sea. “You should see an environment where all three banks should be able to service their clients better, earn better returns, and be more ambitious from a regional perspective,” says Sun.

The real winners

And so for the real winners: UBS Warburg, Morgan Stanley, Merrill Lynch, JPMorgan, Salomon Smith Barney, ANZ and (yes, even them) Goldman Sachs, for a start. Each has gained lucrative advisory roles through this process and in many cases valuable capital markets work too – notably UBS Warburg on OCBC’s recent record-breaking three-currency bond issue (see Deal mechanic) and Merrill Lynch and JPMorgan for their capital raising roles for UOB (see Deal digest). And those that have displayed proficiency can look forward to plenty more where that came from (see box: “Tip of the iceberg”). Singapore doesn’t look altogether comfortable yet with the ins and outs of hostile takeovers. But they’re here to stay.

BOX 1: SORRY! THE QUESTIONS BEHIND THE APOLOGY

 What were they thinking? That has to be the first response to one of the worst PR moments in recent M&A history. It’s one thing to libel a rival bidder, even to pay it compensation. But to have to pay compensation and publicly apologize to the target of your own bid, while that bid is still open, is really something. But there’s more to it than meets the eye.

For those who have somehow missed the story, here’s what happened. Goldman Sachs, advisor to DBS on its bid for OUB, printed a presentation that, among other things, made several criticisms of the rival bid by UOB. This was shown to European investors and, unfortunately, was left with some of them. The presentation found its way to UOB and OUB, who threatened legal action on the grounds of defamation. With the rumoured behind-the-scenes involvement of the government, DBS publicly apologized, running a full-page advertisement in the Straits Times including the text of DBS chairman S Dhanabalan’s letter of apology to both his opposite numbers at OUB and UOB, and their responses; DBS also paid S$1 million to each bank, to be donated to charity. DBS made a point of shifting the blame to Goldman Sachs, claiming it had not cleared the document. “I am very angry and upset… What has happened is not reflective of the way DBS does things.” He must have choked on that apology: Dhanabalan is chairman of Temasek, the investment holding arm of the Singapore government, and a former cabinet minister of 16 years standing.

Beyond the scandal, there are three issues. One, the sensitivity of M&A involving Singapore. Comments like the ones Goldman distributed are nothing new in most parts of the world during a hostile takeover. It seems the bank badly misjudged the sensitivities of Singapore, where these things do not happen in the same way, and that there was an oversight in legal and compliance, if the text was seen by them at all. The furore will be closely noted by any potential acquiror of a Singaporean asset from now on, and by their advisors. Expect lawyers to pick up plenty of fees for advising on what can and cannot feature in a pitchbook.

Two, what will happen to Goldman’s relationship with DBS? The bank is one of its most lucrative clients in the region in recent years, not just for its M&A activity but its increasingly sophisticated use of the international capital markets. But Goldman, which did not respond to requests for comment, does not appear to have lost its client yet. Tai tells Asiamoney: “We have been served well by a number of investment bankers, and it will be in our shareholders’ interest to be receptive to the best ideas from the leading investment bankers, including Goldman Sachs.”

Three – and this is the strange part – what on earth were OUB and UOB doing approving an apology like this? An apology which takes a series of criticisms which had only been voiced to a select few investors in Europe and, by way of retraction, demands that these same criticisms, neatly annotated in reader-friendly bullet point form, are printed in the pages of a national newspaper – and therefore immediately repeated on the front pages of every financial newspaper in the world. If anybody had not thought about the integration issues at UOB/OUB before, or the composition of the board, they certainly did so after that appeared. Commentators say that this represents a demand that everybody sees the retraction no matter who saw the original – and that it really did push DBS firmly out of the picture. But the structure of the apology as approved by the libeled parties must surely have done them more harm than the libel itself could ever have done.

 BOX 2: TIP OF THE ICEBERG

 When DBS’s bid for Dao Heng, and Singapore Telecom’s for Cable & Wireless Optus, appeared in the same month earlier this year, it was clear this was going to be an exceptional year for M&A in Singapore. “Singapore is like Switzerland,” says Philip Lee, head of investment banking for JPMorgan in Singapore. “Small country, but a lot of class companies, and for them to grow they need strategic regional investments.” The result, says Lee, is M&A figures over the last 18 months equivalent to the previous nine years put together.

Banks apart – and they can be expected to acquire again in due course, probably regionally – Singapore boasts companies like Singapore Power, PSA, Singapore Telecom, Singapore Airlines, SembCorp, ST Group and the Raffles group, all of whom look like good candidates to acquire and expand. Most of them have already started. The government, through its investment holding arm Temasek, has clearly signaled its intention to reduce its holdings in Singapore’s biggest companies (like DBS, SingTel and Singapore Airlines) once conditions are right, and still other companies are refocusing their businesses – like Keppel Group selling KCH and the M1 mobile phone operator, in the interests of building up in other areas like shipbuilding. “I can see Singapore driving M&A for the next 12 to 24 months,” says Lee.

For bankers with little else to occupy them in the region, this has been a godsend. “At the halfway point of the year, it [Singapore] probably accounts for about three quarters of our Asian M&A business,” says Michael Lien, managing director at Morgan Stanley. “It’s about $22 billion out of $30 billion – and that’s an unusually high proportion.”

As for the type of deals that will be popular, there are a few things we can learn from recent transactions. One, cash is more popular than stock in a volatile market – hardly unique to Singapore but the OCBC deal showed how smoothly an all-cash deal can go. Two, it is a peculiarity of Singapore that although one needs 90% acceptance to allow a bidder to delist its target, there is a separate trigger at 75% that allows the bidder to apply for a waiver to delist – and that could be important. Three, we certainly now know that what seems fair game in hostile takeovers elsewhere in the world will not wash in Singapore.

 BOX 3: WHAT MIGHT HAVE BEEN

 “In my mind there is no question that our bid essentially unleashed the forces,” says OCBC CFO Chris Matten. He’s referring to forces like the government’s clearly stated desire to see consolidation in the industry, the need to gain scale ahead of foreign competition, and the fact that Singapore’s banks are very highly capitalized as a consequence of the country’s historically strict bank capital laws. “It’s like the pressure building up behind the dam. At some point a crack appears and the whole thing goes: whoosh! Well, we were the crack in the dam.”

That catalytic position proved to be more important and influential than it might at first appear. Matten had looked through a dossier on a potential acquisition of Keppel Capital Holdings (KCH) on his first day in his new job in the week of Chinese New Year. (“I started on the Monday and on Tuesday afternoon my entire staff went on holiday,” he recalls, “so I had plenty of time to study it”.) He worked on the project tirelessly through to the general offer on June 12. But he wasn’t the only one with such grand ideas.

Separately, OUB had been taking a good look around. Keppel apart, OUB was the smallest of the major banks – and therefore vulnerable. So it began to scrutinize the one bank in Singapore that was smaller than itself: KCH.

Asiamoney believes OUB had discussions with Keppel, and might well have made an offer for it had OCBC not got in first; furthermore, it would probably have made a counter-bid had DBS not made its own bid for OUB, taking it out of the running as a potential acquiror.

That removed one potential counter-bidder that could have run against OCBC in a battle for Keppel. “If I were a betting man I would assume competing offers would have emerged for KCH had the DBS offer not come into play,” says James von Moltke, head of financial institutions group at JPMorgan, advisors to Keppel. “Clearly once that offer had taken place, it became a market with two sellers and three potential buyers.” The third of those buyers, the only one not yet involved, was UOB, which had no choice but to enter the fray itself – anything else would have left it so marginalized it would run the risk of being acquired itself, or run out of business by its bigger competitors. So it had a straight choice: make a counter-bid for Keppel, or make a counter-bid for OUB. It opted for scale, and styled itself as a white knight for OUB; it seems to have worked.

All of which demonstrates the following: with all of these plans developing among the senior management of the different banks, it was the person who moved first who dictated what would happen next. What if OUB had made a bid for Keppel before OCBC did? What might have happened then? OUB might have avoided being acquired; DBS might have bid for one of the others, possibly either UOB or OCBC; UOB might have counter-bid for Keppel. The whole market could look different. We’ll never know, but it illustrates one thing: the power of first mover advantage.