Where is the value
THERE is nothing wrong, regulation-wise, for one listed company to buy into another listed company. When one listed firm buys a controlling or majority stake in another listed firm, the rationale seems clear enough. The buyer is looking to take over the running or merge its operations with the target company.
However, when one company buys a small stake in another listed company, the rationale is questionable. The buyer does not get to control the target company. Some companies would rationalise the exercise as one in which the buyer is making a good investment. Others say there are synergies to be achieved.
In the first rationale, it needs to be questioned whether that was the best use of the company’s funds, considering that it is putting its monies into a third party orgnisation that it does not control. Wouldn’t its funds be better put to use by investing in its own business? As for arguments of synergistic value creation, the question is, why can’t the two companies go ahead with building fruitful ventures together, sans any buying of small stakes in one another?
On Bursa Malaysia, there seems to be a growing trend of such deals.
Two weeks ago, Cuscapi Bhd said it had acquired a total of 15.98 million shares or a 0.215% stake in MY E.G Services Bhd (MyEG) for RM15.01mil over the past year.
“The acquisitions are part of the company’s initiative to invest in companies with growth prospects,” Cuscapi had said.
Interestingly, MyEG’s co-founder, Wong Thean Soon, has a direct stake of 2.12% or 20 million shares in Cuscapi. Wong is also the second largest shareholder of MyEG with a 12.1% stake. More perplexing, was the announcement this week by Bintai Kinden Corp Bhd, that it had emerged as a substantial shareholder in Malaysian Genomics Resource Centre Bhd (MGRC) with a 5.03% stake, after acquiring 6.25 million shares.
At the centre of that transaction is Noor Azri Noor Azerai who owns small stakes in both the listed companies and is a director of both companies. Azri Azerai has now been redesignated as an executive director of MGRC and will oversee the business development, human resources and finance functions of the group.
One question is whether it was through Bintai Kinden’s acquisition of the small MGRC stake that has enabled Azri Azerai to take on such a powerful role in the latter. But 5.03% is a small percentage of ownership. A statement by MGRC quoted Azri Azerai as saying that there are synergies in both companies that the firms intend to harness as Bintai Kinden diversified into the healthcare sector. Does Bintai Kinden need to have a 5% stake in MGRC for such synergies to transpire?
Growing wealth ‘ethically’
MUCH has been made about environmental, society and governance (ESG) standards in Malaysia where the chairman of the stock exchange warned that businesses will likely face funding pressures if they fail to comply with ESG standards in the years ahead.
Tan Sri Abdul Wahid Omar made the comment that firms will see increased pressure in their business and funding if they fail to adhere seriously to ESG requirements.
Bursa's Abdul Wahid Omarn
Wahid is probably speaking not just in his position as the stock exchange chairman.He has a long and illustrious history in corporate Malaysia.
Wahid oversaw the restructuring of the Renong Group, arguably Malaysia’s largest corporate debtor from the Asian Financial crisis.
That gave birth to PLUS as a listed entity, which has since been privatised and also Iskandar Malaysia, which was the land owned by the Renong Group prior to its takeover by Khazanah Nasional Bhd.
ESG is a hot topic in recent times and in the future, it is expected that investors and consumers will be asking what companies are doing in that space to make them responsible corporate citizens.
A number of listed companies in Malaysia have fallen short in the requirement for adherence to ESG standards, and a number of companies have been pinpointed for possible breaches.
A few rubber glove manufacturers and plantation companies have fallen foul on ESG breaches when it comes to labour rights. Then there is the overall reluctance by investors to take up large stakes in a number of heavyweight listed companies given the concerns those companies might have with regard to ESG compliance.
It is one of the reasons why stocks on Bursa Malaysia have seen their foreign shareholding levels fall to around historic lows with some hovering around the 20% level.
The other issue is the low number of counters on the FTSE4Good Bursa Malaysia index, which is seen as the “ESG” index of compliance among investors.
There are 80 companies in that index out of the 969 listed companies on Bursa Malaysia.
With less than 10% of the stocks meeting the criteria to comply with the FTSE4Good index listing, it is important to get more companies in that index for positioning Malaysia as a growing ESG market for domestic and foreign investors.
It is true that investors will look at earnings growth and profitability when making investing decisions but that will be benchmarked against other peers in the region and in the wider investing world.
Another reason why it is important to heed Wahid’s warning is that should foreign shareholding remains weak, it will stunt the wealth-creation ability of companies on Bursa Malaysia.
Should the investors feel that the market does not move the needle for them, they will look elsewhere as a growing number of Malaysians are investing abroad.