Wednesday, October 27, 2010

SGX buying ASX: There are projects and there are "projects"

It's old news that SGX is attempting to acquire ASX.

The merger is probably going to be value-destroying, as most M&A deals are. See here. The mature Australian market, the imminent loss of monopoly status for the ASX, and the massive amounts of debt AND equity that the SGX has to issue will probably drag down earnings badly in coming years.

The question to ask, of course, is the old Latin adage, "Cui Bono?"

SGX's senior management, and especially its new CEO, are the likeliest beneficiaries of any deal. They will reap massive bonuses for such a "bold" and "audacious" move should a deal go through. They might even be lauded as being "visionary" and showing "leadership". Not only that, as a helpful side benefit, CEO pay of financial institutions is highly correlated with the market capitalization of the institution. It's why banks have evolved to become TBTF.

When it's time to pay the piper, however, Magnus Bocker should have departed long ago to greener pastures. And the shareholders will reap a bitter harvest.

Why am I talking about this? Because the government doesn't operate so differently.

The government frequently rotates senior civil servants, especially scholars, among different ministries and government entities, arguing that doing so broadens exposure and helps senior civil servants to network with each other so the wheels of power are greased whenever things need to get done. We saw this most recently for YOG when everything including the kitchen sink was thrown at it to make it a "success".

What is less commonly known is that highly motivated Type-A civil servants like to leave a distinguishing mark on their most recently assumed 2-5 year appointment, a giant ego-stroking "I was here and I did [insert grandiose, high-falutin' project]". Kind of like a mongrel cur leaving a huge stinking piss stain to obliterate the mark left behind by the previous dog.

Indicators of such propensities include but are not limited to: 

a) making deprecating remarks about one’s predecessor’s efforts, particularly remarks that have just the right balance of both obsequiousness, condescension and outright disdain [can’t be too obvious about it, right?].

b) insisting on a new five-year roadmap after just two years into the previous one [which was the length of tenure for the previous appointment holder], with an ironclad requirement that the new roadmap must be sufficiently different from the old one.

c) spending a lot of money underwriting a huge project with nebulous objectives, vague sounding actionable plans, lots of buzzwords, and making sure that it enjoys heavy publicity and the appearance of consultation.

It hasn't been uncommon encountering itinerant, know-it-all, hard-to-please dilettantes in my professional life. I call the phenomenon "Gai3 Chao2 Huan4 Dai4". On a practical note, a proposed project that takes more time to complete than the tenure of the local emperor is usually DOA.  

For c) above, do not ever mistake such a project for a vanity project. A vanity project is frivolous and wasteful, but ultimately transparent and relatively pure in intentions.

Such projects serve deeper, more mercenary objectives, namely to elevate the appointment holder’s prestige, and to pad the resume in a quest for a loftier appointment two or more years down the road. Hardly a vanity project; there’s an important goal firmly in sight, just not the one written in the project proposal.

The especially annoying thing is, when reasonable people point out flaws or problems with such a project, it's never the criticisms that are addressed. Instead, the loyalty of the critics is loudly called into question, their judgment or their lack of "vision" is rubbished, and they and their opinions are otherwise dismissed, naysayers and doubting Thomas' all.

In Singapore, the YOG was only just one example in recent memory. There are, of course, others. Here’s a recent one, for instance. Read the last comment in the article and you will see why.

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