Public and Private Companies in Malaysia

The number of private going to public listed company is the common ways to practice in Malaysia. In contrary, public listed companies going private has increased sharply in recent years like the mushroom after raining release onto the business world. This adjustment is formed by the Stock Exchange of Malaysia, Bursa Malaysia. In the beginning of 2007, there has offer a series of privatisation of public listed companies on our local bourse, Bursa Malaysia. The trend of privatisation of public listed companies in the Bursa Malaysia has raised more than 20 privatisations since 2007 (source: Announcements from Bursa Malaysia).

The establishment of the Stock Exchange of Malaysia in 1964 had given a new perspective in the Malaysian economic landscape. This institute will help in quick expansion of its longer term capital growth and enhancing global competitive. Since its formation, the Stock Exchange of Malaysia, Bursa Malaysia, has over 1,000 listed companies provide a wide range opportunity of investment choices to local and foreign investors include retail and institutional level, merchant banks and unit trust companies. Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange, KLSE) has currently more than 982 public listed companies (as at 17 September 2008) with a total market capitalization in excess of RM930 billion. It is one of the largest Stock Exchange in South East Asia, No. 1 in terms of listed companies, and No. 2 in terms of market capitalization after Singapore.

The privatisation continued through 2008 with 21 privatisation proposals on the Bursa Malaysia. According to OSK Research Head Chris Eng comments that the wind of privatisation was expected to be strong next year in view of the low valuation of stocks, although earnings may contract but price-to-earnings ratio is still low. This demonstrates that the privatization will carried out efficiency in the view of the researcher excluded the global financial crisis. Jupiter Securities head of research Pong Teng Siew said “the privatisation trend was unlikely to insist during the global financial crisis. The privatisation issue will outcome in the view of global credit crunch. The global credit crunch can reduce funds available to local and foreign investor.

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An example for proposed plan to privatise in AirAsia had illustrates core issue to privatisation, which is the funding source. However, this will cause the AirAsia stay at the security position. AirAsia’s major shareholder Tune Air Sdn Bhd, leadership by the group’s chief executive Datuk Seri Tony Fernandes, had announce to put on hold its plan to privatise and delist the counter from the local stock exchange due to the difficulties in securing funding. The privatise position will affect their funds and share easily acquirer by outsider owned sufficient capital.

Other factors that may fuel privatization include businesses that were fairly stable where there was no need to raise cash via equity, which in turn made the requirements of a listing such as the need to hold AGMs and issue annual reports.

Such requirements on listed companies had leave the companies with little breathing space, less liberty and make it difficult for companies to make major the decisions such as expanding overseas, acquiring new businesses or obtaining new shareholders without losing precious time in these pursuits. By going private, the company’s major shareholders are able to focus on taking bigger strategic risks in order to enjoy long-term profits without facing intense scrutiny of public shareholders and being constrained by the need to consider how a proposed transaction might influence the quarterly earnings or the volatility of the share price of the company.

Kenanga Investment Bank Head of Corporate Finance Debbie Leong agrees. She said other than cheap valuation; other motivating factors included the cost of maintaining the listing status. She said the same goes for companies too that were not bring benefit from having a listing status, such as the inability to tap the capital market for funds due to lack of visibility to investors, low analyst coverage, or the mere fact that the companies were too small to gain attention from institutional shareholders.

In the view of point, Analysts from anonymous said privatisation also played a significant role in continuous bringing stock prices closer to their intrinsic values (actual cost of the company). Privatisations are likely to involve small to mid-cap companies going forward, as the quantum involves in completing the privatisation would be smaller (less than RM100 million) and thus more manageable when it comes to funding in view of the current global credit crunch.

OSK Research head Chris Eng said it believe that there is an increasing privatisation trend among small, family-owned public-listed companies especially identified where cash per share is higher than the share price. Bursa Malaysia‟s Kuala Lumpur Composite Index had tumbled to 876.40 points on December 19, 2008, a 73% drop from its peak of 1,516.22 on January 2008. It is worth noting that the price-to-earnings ratio of the Kuala Lumpur Composite Index had also dipped to 10.10 times as of the week ended December 19, 2008 from a high of 16.84 times as of the week ended January 11, 2008. Its lowest price-earnings-ratio for the year was 9.31 times for the week ended October 24, 2008.

There are more than a total 86 new listings for the past 3 years from the year of 2006 until 2008, whereby there were 40 new listings in the year of 2006, 28 new listings in the year of 2007 and 18 new listings in the year of 2008 (as at 17 September 2008) on the Bursa Malaysia. Total money raised from the public listing exercise and other corporate exercise was RM 4.1 billon in 2006 and RM 16.8 billion in the year of 2007 (source: from Bursa Malaysia‟s 2007 Annual Report).

“Some RM46.29 billion has been wiped out from Bursa Malaysia‟s market capitalisation in the first half of the year of 2007, as 17 companies were taken private, a stock exchange official said. In contrast, the stock market added RM3.74 billion in market capitalisation from the listing of 16 companies in the same period. Global leveraged buyout volume for the first six months of the year 2007 was estimated at US$450 billion (RM1.56 trillion), more than double the whole of last year of 2006. The privatization of these companies signals a very mature and robust financial market, with a favourable credit market. The cycle of privatisation will turn when interest rate goes up and companies find it more expensive to raise funds from the credit market.” Selvarany Rasiah, Chief Regulatory Officer of Bursa Malaysia (Business Times Malaysia 20 June 2007).

(Source: Business Times 22 September 2008)

Privatisations are common done with reasons; the owner is motivated to do so when the share price does not reflect its fundamental value. Expectations are high that the rate of privatisation may pick up by the third quarter of 2009, once the global credit situation has eased and there is more clarity. Interestingly, PricewaterhouseCoopers Advisory Sdn Bhd, Senior Executive Director Tan Siow Ming says private equity firms may feature more prominently as an alternative source of financing for the privatisation exercises. Three factors, he says, may whet the appetite of private equity players in the “public to private deals”. Firstly, they have a considerable amount of investible funds in their coffers; secondly they are able to leverage at reasonable cost given the current credit crunch; and thirdly, it may fit strategically with their overall investment strategy.

The economy report made by shahriman johari, rupa damodaran ,chong pooi koon had said “Malaysia’s economy growth is expected to increase between 2 per cent and 3 per cent in 2010 which supported by private investment and consumption.”

(Source: Business Times Saturday OCT 24, 2009)

THE government plans to privatise selected government agencies and give customised incentives to attract fresh investments from the private sector. This forms part of the government’s plan to develop a new economic model based on high income, which will be the focus in the 10th Malaysia Plan (10MP). It did not select which agencies will be privatised, but this will recognized as the second wave of privatisation. The government has work out their effort to improve the financial sector to facilitate efficient intermediation. Then, it can measure to enhance access, cut transaction costs and promote stock broking and fundraising activities. Small and medium enterprises (SMEs) won’t be left out. There are incentives to help them modernize and sustain their operations. In addition, the numerous grants and loan schemes will be rationalised to improve access and effectiveness (Source: Business Times Saturday OCT 24, 2009).

Obviously, the privatisation exist M&A transactions in Malaysia. The main regulations governing M&A transactions in Malaysia include the Companies Act 1965, the Capital Market & Services Act 2007 („CMSA‟), the Guidelines provided for the Acquisition of Assets, the Malaysian Code on Takeovers and Mergers 1998 („Take-over Code‟), Mergers and Takeovers issued by the Foreign Investment Committee („FIC Guidelines‟) and the Listing Requirements of the Bursa Malaysia Securities Berhad („Bursa Malaysia‟) for public listed companies. Section 216 of the CMSA and the Companies Act 1965 govern M&A transactions that involve the sale or purchase of substantial assets by a public company while Section 217 of the CMSA and the Take-over Code regulate M&A transactions that involves the acquisition of voting shares which results in a change of control in a company. These regulations are put in place to protect the interests of shareholders and to ensure that all take-overs and mergers take place in a competitive, informed and efficient market. Also, the laws and regulations are to ensure all shareholders of a company involved in a take-over and merger situation receive fair and equal treatment. Public listed companies in the Bursa Malaysia are adjustment become private encourage whole acquisition offer to the shareholders of the public listed company. The conduct of the take-over schemes are regulated by the Securities Commission and are subject to the Malaysian Code on Take-Overs and Mergers 1998.

The general offer trigger is 33% where:

(i) In order to an acquisition of 33% of voting shares by a person in addition with persons acting in concert with them (acquirer), or when

(ii) The acquirer had already holds more than 33% but less than 50%, hold 2% within a period of 6 (six) months from the date of acquisition would require that such a mandatory offer be made.

Once the level of acceptance has achieved 50% of more, the offer becomes unconditional. Some acquirer exposure in a condition for a takeover of other property such that it must have at least 50% of the shares in a voluntary takeover scheme, failing which the acceptance will be the rate of return to shareholders. Once the acceptance of the takeover breaches the 75% level, the listed company breaches the public shareholding spread requirement under the Listing Requirements of the Bursa Malaysia. The public listed company which drop short of the 25% spread requirement may request for an extension of time from Bursa Malaysia to rectify the situation. The company could be suspended or delisted unless the listed company finds means of increasing the public spread to at least 25% again if no extension of time is granted by Bursa Malaysia (Source: Bursa Malaysia Listing Requirements and Securities Commission Malaysian Code on Take-Overs 1988).

The most common methods of privatization observed on our Bursa Malaysia are as follows:-

1. Direct offer – A voluntary general offer can be made for the rest of the shares not owned by the owner or related parties acting in concert.

2. Via a new company or special purpose vehicle company – The owner can use a new company or incorporate a special purpose vehicle company to acquire all his shares and the rest of shares owned by the other shareholders.

3. Acquire the business – In order to avoid rejection by some minority shareholders, more and more owners are using this method, i.e. seeking shareholders‟ approval to sell the entire business and thereafter distribute the cash proceeds back to shareholders. The end effect is the same as cash offer for the shares.

1.2 Objectives of the Study

Based on the gains sharing issue highlighted above, this study carries out an analysis on the numbers of publicly traded companies in Malaysia that had participated in going private transactions in 2007. Moreover, there have been myriads studies concerned on the motive and/or reasons for mergers and acquisitions mostly in the United States, United Kingdom and Europe, but very few motives and/or reasons have been addressed for public listed companies going private. The number of public listed companies going private has increased sharply in recent years like the mushroom after raining especially in Malaysia, as part of widespread corporate restructuring. Privatisation is the reverse of a public listing exercise. However, little evidence has been provided to prove for similar applications in the Malaysian capital market. This paper aims to fill the gap and contribute to existing literature. The objective of this study is to determine the following:-

1. What is the motive for a public listed company to go private?

2. How is the price earnings ratio and price to book valuation of a public listed company in relation to companies being taken private?

3. How emphasis is given to the offer price that has been offered by these companies to their public shareholders and with this the study strives to achieve the objectives? The following objectives below are;

i) To measure the fairness of the offer price offered to the minority shareholders by comparing the share price derived by the discounted cash flow valuation with the offer price offered by the companies when the transaction took place; and

ii) To assess whether the gain sharing proposition established in previous literatures can be generalized in Malaysia financial market as what observed in the in the country such as the U.S., the UK and other European countries.

1.3 Scope of the Study

This study will cover all public listed companies listed on the Bursa Malaysia which is being taken private in 2007. It will examine the motives and/or reasons for public listed companies in Malaysia going private. Recognizing the need to protect the minority shareholders’ interest in Malaysia, especially in the exercises that are undertaken by the publicly held company that have a significant impact on public shareholders, this study aims to contribute to this effort by focusing on going private transactions.

1.4 Purpose and Significance of the Study

There have been numerous studies concerned the motive and/or reasons for mergers and acquisitions, but very few motives and/or reasons have been addresses for public listed companies going private. The number of public listed companies going private has increased sharply in recent years especially in Malaysia, as part of widespread corporate restructuring and/or mergers and acquisitions. Furthermore, this study will cover and overview all public listed companies listed on the Bursa Malaysia which is being taken private in 2007 which is recognize as privatisation that reverse from public listing exercise. The objective of this study is to examine why this new trend emerges and what causes it to happen.

1.5 Limitations of the Study

The privatisation of Malaysia‟s public listed companies was relatively new phenomena that started in 2006 and implement in 2007 throughout 2008, a relatively short period of study as compared to studies of privatisation of public listed companies in UK from 1997 to 2003 by (Renneboog, Simons and Wright 2005). Thus, the scope of the study is limited to Malaysia‟s public listed companies in the Bursa Malaysia – going private in the year of 2007. There is lack of information for Malaysia due to the new trend or phenomena.

1.6 Organization of the Study

The paper is divided into five (5) chapters. The first chapter of this research describes the driving factors that led to this study. It highlights the background, objectives, scope of the study as well as the significance of the study. Chapter two (2) of this study will cover the literature review and to provide evidence which found from the previous studies on various reasons behind public listed companies going private. It will be used to support discussion and findings from the data analysis. Development of hypotheses, selection of measures, sampling design, data collection procedure and analysis are outlined in Chapter three (3). Chapter four (4) draws some research result of this study and conclusion and recommendations will be presented in Chapter five (5).

CHAPTER 2

LITERATURE REVIEW

Before us deeply into the public listed companies to go private. Understanding that why did the companies decided to become a public listed company is very imperative. Roell (1996) documents five reasons why owners of firms decided to go public.