Short Position – Companies Value and Grow Wealth “Ethically”
Where is the value There is nothing wrong, from a regulatory point of view, for a listed company to buy another listed company. When a listed company buys a controlling or majority stake in another listed company, the logic seems pretty clear. The buyer seeks to take over the operation or merge its operations with the target company.
However, when a company buys a small stake in another listed company, the rationale is questionable. The buyer does not control the target company. Some companies would rationalize the exercise as one in which the buyer makes a good investment. Others say there are synergies to be achieved.
In the first reasoning, one has to ask whether this was the best use of the company’s funds, given that it places its funds in a third-party organization that it does not control. Wouldn’t his funds be better spent investing in his own business? When it comes to the synergistic value creation arguments, the question is why can’t the two companies continue to build successful businesses together, without any purchase of small stakes in each other?
In Bursa Malaysia, there seems to be a growing trend of such transactions.
Two weeks ago, Cuscapi Bhd said it acquired a total of 15.98 million shares or a 0.215% stake in MY EG Services Bhd (MyEG) for RM15.01 million in the past year.
“The acquisitions are part of the company’s initiative to invest in companies with growth prospects,” Cuscapi said.
Interestingly, MyEG co-founder Wong Thean Soon owns a 2.12% or 20 million share direct stake in Cuscapi. Wong is also MyEG’s second largest shareholder with a 12.1% stake. More perplexing, was the announcement this week by Bintai Kinden Corp. Bhd, that he had become a significant shareholder of the Malaysian Genomics Resource Center Bhd (MGRC) with a 5.03% stake, after acquiring 6.25 million shares.
At the center of this transaction is Noor Azri Noor Azerai who holds small stakes in both listed companies and is a director of both companies. Azri Azerai has been renamed executive director of MGRC and will oversee the business development, human resources and finance functions of the group.
Whether it was through Bintai Kinden’s acquisition of MGRC’s small stake that Azri Azerai was able to assume such a powerful role in the latter remains to be seen. But 5.03% is a small ownership percentage. An MGRC statement quotes Azri Azerai as saying there are synergies in the two companies that the companies intend to leverage as Bintai Kinden diversifies into the healthcare sector. Does Bintai Kinden have to hold a 5% stake in MGRC for such synergies to materialize?
Grow Wealth “Ethically”
A LOT has been done on environmental, societal and governance (ESG) standards in Malaysia, where the stock exchange chairman has warned that companies are likely to face funding pressures if they fail to comply with ESG standards in years future.
Tan Sri Abdul Wahid Omar noted that companies will come under increased pressure on their operations and funding if they do not seriously adhere to ESG requirements.
Wahid probably doesn’t just speak as the president of the stock exchange. It has a long and illustrious history in Malaysian business.
Wahid oversaw the restructuring of the Renong Group, arguably Malaysia’s largest corporate debtor from the Asian financial crisis.
This gave birth to PLUS as a publicly traded entity, which has since been privatized, as well as Iskandar Malaysia, which was the land owned by Renong Group prior to its takeover by Khazanah Nasional Bhd.
ESG has been a hot topic lately and going forward, investors and consumers are expected to ask what companies are doing in this space to make them responsible corporate citizens.
A number of companies listed in Malaysia have failed to meet the ESG compliance requirement, and a number of companies have been flagged for possible breaches.
A few rubber glove manufacturers and plantation companies have committed ESG labor rights violations. Then there is the general reluctance of investors to take large stakes in a number of heavyweight listed companies, given concerns these companies might have about ESG compliance.
This is one of the reasons Bursa Malaysia shares have seen their foreign ownership levels drop to 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 considered the compliance “ESG” index among investors.
There are 80 companies in this index out of the 969 companies listed in Bursa Malaysia.
With less than 10% of stocks meeting the criteria to comply with the FTSE4Good index listing, having more companies in this index is important to position Malaysia as a growing ESG market for domestic and international investors. strangers.
It is true that investors will look at earnings growth and profitability when making investment decisions, but this will be benchmarked against other peers in the region and the broader investment world.
Another reason why it is important to heed Wahid’s warning is that if foreign ownership remains low, it will hamper the wealth-creating ability of Bursa Malaysia’s businesses.
If investors feel the market is not moving the needle for them, they will look elsewhere as increasing numbers of Malaysians are investing overseas.