I’m no expert on acquisition, but TS Khalid, Treasurer for PKR, does seem to raise some cogent and distressing points.
I happen to have an English version of his op-ed, enclosed below.
RHB Takeover Jeapordises the Livelihoods of Millions of Malaysians.
by TS Khalid Ibrahim, PKR Treasurer
The acquisition of RHB Banking Group by the Employers Providence Fund (EPF) has raised the concerns of many sections of society, seeing as how the welfare of some 9 million Malaysians have been entrusted to the EPF.
This issue should be seen through the lens of the primary and original function of EPF, the experience of EPF in the banking industry, basic investment principles and national banking policies.
Firstly, this buyover will displace the founding principles of EPF as a fund manager that needs to ensure good financial returns to its members within a 25 to 30 year period.
In the early years after its formation in the 1950’s, the EPF was required to invest 70% of its assets in securities or government bonds. This clearly reflected the natural need for EPF to be conservative in its investments.
From the 1980’s onwards, government bonds were reduced when privatisation was introduced, and this forced EPF to transfer its investments to equity. Nonetheless, it remained as a passive investor.
By the 1990’s, EPF investments in government bonds had been reduced to about 30% whereas investments in equity had risen from 2% in 1990 to 19% in 2005.
As a normal fund manager, EPF should not own more than 10% in equity investments. It is important for EPF to retain its function as an investor alone, and not become involved in the management of any company.
EPF needs to retain its conservative nature because it is the only long term fund that is responsible for the welfare of its 9 million members.
EPF equity investments also frequently results in severe financial failure or great hardship in the last few years, amongst them the staggering financial losses incurred in the investment into Malaya Borneo Building Society (MBBS).
Therefore, to acquire a banking group without any banking experience is an eminently illogical decision. The CEO of EPF himself, Azlan Zainol, has admitted that EPF does not possess expertise in the banking industry.
The buyover of United Malayan Banking Corporation (UMBC) from Sime Darby in 1995 proved to be a failure. The debts incurred by UMBC were then transferred to Sime Darby, a plantations company, and were thereafter assumed by the RHB banking group after the merger of the two banks in 1998.
The debts of the RHB banking group have run in excess of RM 3.4 billion as of August 2006, and it is presumed that these debts will be taken over by EPF.
What needs to be stressed is that although EPF can control RHB through ownership of equity, EPF simply does not have the capacity to manage a banking group with such immensely heavy debts.
From an investors point of view, and using the most basic of investment principles, it makes most sense to diversify one’s investments. With a 75% stake in RHB, EPF will not be able to act fairly towards other banks, and this will increase the risk profile of EPF significantly.
EPF should instead emulate the investment principles of Warren Edward Buffet, a succesful investor and the second richest man in the world. Buffet’s primary approach is to invest in low-value securities that guarantee returns on investment and not to interfere in the management of any company. This practice would allow EPF to sell or exchange equity without any conflicts of interest.
Even if the government truly wishes to reduce the number of banks in order to raise banks’ capacity to compete on an international level, as per the national banking policy, it should not use EPF to achieve this goal.
The buyover of RHB by EPF will not reduce the number of banks in this country. To achieve this, the government, through Bank Negara, should direct some banks in the country to merge with the RHB banking group, as happened in the 1990’s.
Should the government stubbornly decide to use EPF to acquire RHB, against all economic and financial logic, this act will undoubtedly jeapordise the livelihoods of millions of ordinary Malaysians.