Mergers and value creation: A case study of Sime Darby Berhad

Mohamad, Awasi (2008) Mergers and value creation: A case study of Sime Darby Berhad. Masters thesis, University of Malaya.

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Globalisation and the borderless world has brought with it heightened competition in the business circles. In not too distant a future, only very large multinational and multicultural management companies with economies of scale, globalised markets network, quality products meeting consumers’ expectations and taste but yet cost efficient would be able to survive. Smaller companies with specialised, differentiated and proprietary products would be the exception to this trend. There are many examples of industries impacted by globalisation which have taken the successful route of mergers and acquisitions (M&A). These included the airlines, banking, automotive and oil & gas industries. Closer to home we have seen the successful M&A of the local banking industry. Synergy Drive Berhad (Synergy Drive) is a Special Purpose Vehicle (SPV) company set-up by CIMB Group’s private equity arm with the intends to merge all the assets and liabilities of Sime Darby Group, Kumpulan Guthrie Berhad, Golden Hope Plantations Berhad and six (6) of its listed subsidiaries. As such the merger of Sime Darby, Golden Hope and Kumpulan Guthrie is considered appropriate and timely to take advantage of economies of scale, synergies and greater productivity and efficiency. Synergy Drive’s plantation business would be able to emulate the three large multinationals in the USA which control the world’s edible oils markets like Cargill Incorporated, Archer Daniels Midland (ADM) Company and Bungee Corporation. Historically, the financial performance plantation business can be seen to be influence greatly by the prices of palm oil and hence the palm oil industry is often referred to as cyclical in nature. In order to ensure that profits will not fluctuate greatly, the plantation business began their diversification all along the value chain or aptly termed as a fully integrated player. A good example is PETRONAS, where the core business is petroleum. Building on the sound foundation anchored on integration, value-adding and globalisation, PETRONAS whose their initial involvement with multinational oil companies started with production sharing contract has since moved its upstream business overseas and downstream activities very successfully. Taking the cue from this, it would be strategic indeed for the plantation business to emulate the approach of PETRONAS by strengthening further both upstream and downstream sectors. Synergy Drive could move from just concentrating on the production of basic oleochemicals i.e. fatty acids which are derived from the splitting process, to the production of higher value-added products. The creation of the largest plantation companies by merging Sime Darby, Golden Hope and Kumpulan Guthrie brings about significant prospects of cost and revenue synergies. The cost synergies among others include consolidation of contiguous estates, rationalisation of mill utilisation, unified procurement and logistic activities and consolidation of plantations management and administrative functions etc. The revenue synergies would include leveraging on global strategic presence of the three companies and wider customer spectrum for growing market share. The sharing of best practices and management expertise could also further enhanced both cost and revenue synergies. In addition to that, Synergy Drive able to move forward with sustainable profits gains, productivity, capabilities, skills and expertise in its business operations and core competencies building. As an enlarged entity, Synergy Drive would have the capability and capacity to grow further the plantation and property business. On 27 November 2006, Synergy Drive announced simultaneous offers to each of the participating companies through Voluntary General Offer (VGO) and Mandatory General Offer (MGO). Synergy Drive had offered eight (8) companies to acquire all their assets and liabilities under VGO namely Sime Darby Berhad, Sime UEP Properties Berhad, Sime Engineering Services Berhad, Kumpulan Guthrie Berhad, Mentakab Rubber Co. Berhad, Golden Hope Plantations Berhad, Guthrie Ropel Berhad and Highlands and Lowlands Berhad. At the same time, Synergy Drive also offered Negara Properties Berhad through MGO by issuing 11.6 million shares. By 1st October 2007, Synergy Drive and all participating companies have obtained all the requisite approvals to effect the merger. The major institutional shareholders of Synergy Drive are Permodalan National Berhad (17%), Amanah Saham Bumiputra (30.9%), Employees Provident Fund (11.7%) and other shareholding (40.4%). The consolidation of all businesses of these three group of companies had formed five (5) strategic core businesses of plantations, property, motor, heavy equipment, and energy and utilities. From the merger, Synergy Drive’s had valued the target companies at a combined proforma market capitalization of RM 53.8 billion. The group is the world’s largest listed oil palm plantation group by planted land areas (520,000 ha), with significant presence in both upstream and downstream activities, i.e. they owned 65 mills in Malaysia & Indonesia. They are one of Malaysia’s leading developers of quality residential and commercial communities. Therefore, this study aims to investigate not only the issues faced by Synergy Drive in the pre-merger and post merger integration process, but also to evaluate the purchase consideration made for the merger, the types of financing used, achievement of the motivation for the merger and the value created via merger. Accordingly, our study had identified that Synergy Drive does achieve their value creation via this merger exercise. A positive uptrend was shown upon the listing of the renamed Sime Darby on Bursa Malaysia and their shares remains as one of the top plantation shares for most foreign broking houses. The stock to date has surpassed the expectations of most broking houses, which had earlier capped the stock at the RM11-RM12 range for 2008. In addition to that, Synergy Drive did achieve its merger objectives in terms of business size, broader market penetration and wider market segments. The merger also allowed them to draw their focus on a set of core businesses within Asia Pacific and gain the benefits from population growth and economic development.

Item Type: Thesis (Masters)
Uncontrolled Keywords: Banking industry, Sime Darby Group, Synergy, Merger, Golden Hope
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Date Deposited: 23 Jul 2013 06:29
Last Modified: 23 Jul 2013 06:29

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