MUFG acquiring banks, but why sell CIMB?

Article from Bloomberg:

MUFG Seeks to Spend $900 Million on Acquisitions in U.S, Asia

One snippet:


Mitsubishi UFJ Financial Group Inc.’s lending arm is seeking acquisitions of about 100 billion yen ($890 million) in Asia and the U.S. to bolster its global operations, its top executive said.

Bank of Tokyo Mitsubishi UFJ Ltd., to be renamed MUFG Bank in April, would consider taking majority stakes in banks in countries such as Indonesia or India in addition to the U.S., Chief Executive Officer Kanetsugu Mike said in an interview. 

While Japan’s biggest bank has previously signaled interest in buying lenders in the countries, it’s the first time a senior executive has indicated how much it might spend. Mike, 60, said any decision would be based on strategic fit, price and profitability, while noting that U.S. targets are “expensive” at the moment.

Japan’s biggest banks are expanding abroad to make up for declining loan profitability and a shrinking population at home. In the U.S., MUFG owns a bank with a heavy presence in California, and is the largest shareholder in Morgan Stanley. It bought stakes in banks in the Philippines, Thailand and Vietnam in recent years.

Overseas business remains “a driver of growth for both the bank and the group,” Mike told a group of reporters at the lender’s Tokyo headquarters.


This seems like a rather clear intention, it wants to expand overseas by buying stakes in other banks.

But this is in rather stark contrast to MUFG selling its stake in CIMB only half a year ago, so why exactly did it do that?

Oops, CIMB releases Vivocom's results premature (2)

During the day CIMB took the research note from their website:

And later Vivocom announced their 3rd quarter results, very similar (but not exactly the same) as the numbers from CIMB. Probably CIMB used some preliminary numbers in their research report.

Bursa just today announced that it reprimanded SKP Resources and fined 3 executive directors.


SKP had verbally disclosed the Contract including the contract value [RM 400 Million worth] to 2 research houses on 7 May 2015 without making an announcement of the same to Bursa Securities immediately thereafter.


Of interest for the Vivocom case is the following (emphasis mine):


..... a listed issuer must ensure that no disclosure of material information is made on an individual or selective basis to analysts, shareholders, journalists or other persons unless such information has previously been fully disclosed and disseminated to the public (i.e. to Bursa Malaysia Securities pursuant to paragraph 9.08(5) of the Main LR).


In other words, it appears that Vivocom clearly breached the listing rules in a similar way as SKP by selectively disclosing (preliminary) quarterly results to CIMB.

Apart from that, there is the ethical issue, surely CIMB, being professionals in this business, must have know that Vivocom was breaching the listing rules.

And lastly there is the question if Vivocom and CIMB were much too close for comfort, as witnessed by the many postive research reports from CIMB, the high target price and the above breach of the rules.

Oops, CIMB releases Vivocom's results premature

CIMB released a research report about Vivocom "Tracking expectations":

There is one "tiny" problem with this, the company itself has not yet announced its quarterly results.

That is of course a major screw up.

Both from the side of CIMB and from Vivocom.

It also shows that certain parties are privy to inside information, while others (the public) are not. A situation that should be avoided. The question is if this happens more often, a company releasing sensitive information to other parties before the information is officially announced.

I wrote twice about CIMB reporting about Vivocom, here and especially here. CIMB has a rather aggressive price target of RM 0.62 vs current share price of only RM 0.18.

CIMB: which process shortcomings?

On April 18, 2016 CIMB announced:

".... that Dato’ Sri Nazir Razak will take a voluntary leave of absence from his positions as Chairman of CIMB Group and Director of CIMB Bank, with effect from close of business today till the completion of an ongoing Board review on the banking activities relating to his personal account".


In these kind of CG cases it is important that the independent directors step up their game, and show their independence. They have to tackle the issues at hand from all different directions in an unbiased way.

However, in this case it looks like they had made up their mind already. Before the board review had even started the senior independent director stated:


"... the members have always been convinced that he upholds the highest standards of corporate governance. While this decision [to take leave of absence] of his is contrary to the Board's wishes ..."


On May 18, 2016 CIMB announced:


Dato’ Sri Nazir Razak did not misuse his position as the Group Chief Executive at that time nor was there any inappropriate use of the bank’s resources.


That might have been the case, but first of all more details regarding this would have been welcome.

Secondly there are many other issues (legal, ethical, moral etc.) involved, but the announcement does not touch on those.

The announcement continues:


".... the detailed examinations conducted during the review identified some process shortcomings,"


Again, there is no explanation whatsoever what those "process shortcomings" are.

CIMB selling part of PE business?

Article in Focus Malaysia (partially behind paywall): "CIMB’s ex-CFO to buy its PE biz".

Please note that the article is based on rumours: "It is learnt", "A banker says", etc., no official announcement has been made, so we need to wait for official confirmation.

The deal would be noteworthy since there would be a large conflict of interest the stake being takeover by the people who manage it:


"... former chief financial officer Kenny Kim and senior executives mulling a takeover of the banking group’s private equity business.Under the deal, Kim and his associates are expected to acquire a 70% stake in the CIMB private equity unit, with the balance to be retained by the banking group."


The reasoning behind the possible move seems to be:


" .....a move by CIMB to detach the private equity unit’s financials from the group’s consolidated accounts. This is part of the implementation of Target 2018 or T18, announced in February, that includes the bank’s aim of a return on equity (RoE) of more than 15% by 2018.In FY13, the latest financial year for which its results are available, the CIMB private equity business went into the red with a RM4.68 mil loss after four years of profit. The sale of CIMB’s private equity business may improve some of the T18 financial benchmarks."


That would be kind of reasoning (dressing up of the accounts) of which I am not exactly a fan.

Managers of PE funds normally work under a 2/20 rule, meaning they would get 2% a year (in this case a cool RM 120 Million) and subsequently 20% of the profit after returning the original amount to the investors (since the amount under management is RM 6 Billion, this could be very substantial).

The PE industry in the US is quite controversial, here is a collection of articles from one of my favourite bloggers on this subject.

EPF not allowed to vote in RPT

Bursa has made its final decision, EPF is not allowed to vote in the CIMB-RHB Capital-MBSB deal. The reasons behind this can be found here:


EPF’s position is not the same as the other shareholders of RHB Capital premised on the
following:

(a) EPF’s controlling stakes in RHB Capital (41.5%) and MBSB (64.5%) place it in a position of significant influence in these companies;

(b) as the single largest shareholder of RHB Capital and MBSB and a major shareholder in CIMB Group, EPF may benefit from the transaction as a shareholder of MBSB and/or CIMB Group. As such, its overall position would differ from a party who is merely a shareholder of RHB Capital, especially given the differing terms and valuations applicable to the 3 affected companies; and

(c) EPF has prior knowledge of the Proposed Merger as it was notified by CIMB


I think that this decision is spot-on. I think that EPF should be able to block the whole deal if it thinks it is in their disadvantage.

But given that the EPF does indeed support the deal, it should not be able to push the deal through by being allowed to vote. This is after all a Related Party Transaction (RPT), and it is one of the Corporate Governance areas of great worry in Malaysia.

EPF has different percentages in each of the three companies, which means that it has a clear preference in the outcome: a relatively higher valuation for the company it has a large stake in, and vice versa.

If subsequently the minority investors shoot the proposal down, then may be it isn't that great anyhow.

Many corporate restructure exercises do disappoint, the outcome being less good than forecasted by the dealmakers who made the shiny PowerPoint presentations, showing all the synergy.

In reality, things are not that easy, cultural clashes of the employees of the different companies are quite common and economies of scale do not always work as expected.


To all Hindu readers: Happy Deepavali!