Caution: rail merger ahead

PUBLISHED : Saturday, 15 April, 2006, 12:00am
UPDATED : Saturday, 15 April, 2006, 12:00am

If some of our politicians are to be believed, the financial terms of the proposed merger between the Mass Transit Railway and the KCRC are bad: MTR Corp shareholders stand to get more out of the deal than the general public.

But analysts tracking the fortunes of the MTR Corp disagree over that conclusion. While some say the merger will create more upsides than downsides for the MTR Corp, others say minority shareholders should reject it - as the politically driven exercise may drag down the corporation's performance.

If people can make such contradictory comments based on the financial terms of the merger, imagine how views might become even more extreme if the intangible factors - which have attracted little public attention - were taken into account.

The intangibles are important. All over the world, the figures that investment bankers use to justify mergers and acquisitions look good on paper. But most such exercises, after they are consummated, fail to produce the expected synergies - for reasons that have nothing to do with finances.

A major cause of failed mergers is a clash of corporate cultures between once-separate entities. Another is the loss of talent from one partner - gobbled up by the other. It would be interesting to see if these scenarios apply to the forced marriage between the two Hong Kong rail operators.

The KCRC is a century-old entity that started as a government department. Although it was corporatised in 1982, it has never really shrugged off its bureaucratic legacy. By contrast, the MTR Corp is just over 30 years young and has a good track record as a government-owned - but commercially driven - enterprise.

In the wake of last month's failed mutiny at the KCRC, when senior managers tried unsuccessfully to oust its non-executive chairman, staff morale at the rail operator has been low. With or without the merger, many managers who took part in the revolt are fretting about their future.

Most of them have worked at the KCRC for decades. Although no one is irreplaceable and the MTR Corp has a wealth of talent, it would be foolhardy to expect they could take over the portfolios - and the staff - of their KCRC counterparts without causing waves.

Of course, no one expects MTR Corp chief executive Chow Chung-kong to be foolish enough to do that without proper planning. As one of Hong Kong's most successful home-grown executives to excel on the world stage, he has fried much bigger fish before.

Headhunted to be chief executive of the British engineering giant GKN in 1996, he managed to develop the 250-year-old company beyond the most optimistic forecasts. For his remarkable performance, he was knighted. In 2001, he steered through a merger between a GKN subsidiary and its Australian joint-venture partner, Brambles, and received the prestigious AIB International Executive of the Year Award that year.

Unfortunately, after he relocated to Sydney to manage the merged entity, now called Brambles, things apparently did not work out. During his two-year reign, before he returned to Hong Kong to head the MTR Corp, the company's share price fell by as much as 60 per cent.

Analysts differed over whether Brambles' disappointing performance could be attributed to Mr Chow's management failings.

Whatever he might have succeeded or failed to do there, the experience will be invaluable as he guides the impending MTR Corp-KCRC merger.

Considering the intangibles that might stand in the way of a smooth merger, it is only fair that the MTR Corp be given a premium for the trouble of digesting the KCRC and making it better.

If that has to be reflected in the apparently more favourable terms for MTR Corp shareholders, then so be it. After all, if some analysts are right, there is a chance the merger might fail.

C.K. Lau is the Post's executive editor, policy. He is an MTR shareholder