DBS buys into entrepreneurial talent
The Singaporeans look to be on the march across Asia.
First it was Singapore Telecommunications (SingTel) making a bid for Australia's Cable & Wireless Optus and a 25 per cent stake in India's largest telecommunications firm, Videsh Sanchar Nigam (VSN). Now DBS has vaulted into Hong Kong's crowded banking market with a gung-ho takeover of Dao Heng Bank.
Investors are nonplussed and both firms have seen their share prices hammered in recent days. On Wednesday, DBS said it was building for the long term and was not worried about the sell-off. Investors tend to be more concerned about value creation and wonder if the firm has the ability to profitably knit such investments into something bigger.
Having watched its economic hinterland dissolve after the Asian crisis, Singapore wants to bounce back through corporate expansion. For Dao Heng, it is paying Guoco Group a rich three times book value for its 71.3 per cent stake.
Dao Heng may rank fourth in the local banking hierarchy by assets, but by most other measures is an easy third. It is professionally run and, crucially for DBS, a clean structure with none of the murkiness that comes with SAR family-run banks. Analysts are comfortable with its accounting practices and impressed by its brand building, cross-selling efforts and cost management.
As such, three times book was perhaps just the price DBS had to pay. It could have bought other banks for far less - most local banks trade at about 1.5 times book value - but would have inherited a management headache it probably did not have the resources to execute.
Whether DBS can jump into the mainland market using Dao Heng is questionable. Before that, it must manage the competitive environment of a SAR interest-rate deregulation. As a high-profile Singaporean bank, it will have to tread carefully, given popular ambivalence about the city state. Some account holders may prefer to build a long-term relationship with a local player.
Certainly, the Singapore Government, which controls about 35 per cent of DBS, will hope it makes a success of Dao Heng. It has corralled its citizens to buy shares in both DBS and SingTel through their pension savings accounts. Both firms' share performance has been poor and so success in their regional expansions matters greatly.
Whether it makes sense is another matter. Both SingTel and DBS are former government-controlled firms facing deregulation and an uncomfortable decline in oligopoly profits. Using those acquired surpluses to buy entrepreneurial talent at great multiples to book value may be a deal-making necessity but reflects better on the acquired than the acquirers.
In the case of VSN, it is buying into profits earned from the firm's monopoly control of India's international call gateway. Given that India has a burgeoning software industry dependent on cheap international bandwidth, there might be a good reason the stake is up for sale.
Dao Heng was started in 1984 by Hong Leong Group's Kwek Leng Hai. The original shell company was a shirt-making firm. To cash out 17 years later for as much as HK$42 billion represents spectacular value creation.
The other big winner has been the Hong Kong consumer. Allowing such a start-up has increased choice and customer service across the industry.
Singapore is cautiously opening its banking sector. HSBC recently applied for a full banking licence but reportedly was told it would be granted only on condition it move its regional headquarters from Hong Kong to Singapore. It reveals two different views to value creation - the presence of a few dozen HSBC executives would have made little difference to its real business.
It would be interesting to see how the Singapore Government responded to an HSBC or Citicorp approach to take over DBS. The Dao Heng lesson is the virtue of allowing entrepreneurial talent to flourish.
In Dao Heng, it has bought that talent but at a considerable price and that really is the point.
Jake van der Kamp is on holiday.