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.

Why some visitors come to Singapore

Here's an excerpt from a book I read a while back, Poorly Made in China. Given the growing importance of China to the world, I had felt I needed to know more about doing business in the country, even if I actually am not in the business line. The unexpected finding was seeing how this explained some observations in Singapore. If you've ever wondered why visitors from places like Africa come to Singapore and buy massive amounts of goods from Mustafa or Sim Lim Square, here's the answer.

(If you want to know more about Poorly Made in China, click on the link on my Currently Reading list on the right.)

Excerpted from Poorly Made in China:

Why would a Chinese manufacturer willingly make a product for a dollar and sell it for only a dollar? Chinese manufacturers did not have the same concerns for covering their fixed costs as their counterparts in capitalist countries had. Could it be that this was all part of a long-term strategy and that “profit zero” was economically efficient?

…

Americans somehow imagined that Chinese factories existed to manufacture merchandise only for the United States, but this was not the view from China at all.

From China, the world appeared divided into two parts. One half of the world was made up of countries where intellectual property rights enjoyed wide protection. Because patents and trademarks were honored, there was, not coincidentally, a great deal of investment going on in the area of product design and marketing. Order sizes in this first market – which included the United States and Canada, as well as a number of Western European countries – tended to be larger. Chinese manufacturers favored importers from these economies, not so much because of their volume, but more for what they could lend in the way of design and marketing. Manufacturers gave considerable discounts in order to entice the first-market importers to place orders in China.

The other half of the world was made up of secondary economies where intellectual property was not well protected. In this second market, not coincidentally, investment in product design was low. China still wished to do business with this other half of the world because while their volumes were low and they did not provide much in the way of design, they tended to pay higher prices for goods out of China.

One of the features that characterized China’s export market in the first decade of the twenty-first century was the way in which it took advantage of being at the very center of the globalization phenomenon. China was at a crossroads of international trade, and importers were arriving, not just from places like the United States, but also from Latin America and the Middle East – economies where trademark and copyright were not observed. Manufacturers that produced products using unique, original designs provided by importers realized that they were perfectly positioned to take advantage of the situation by moving designs from one part of the world to the other, while earning a premium in the process. This was not customer segmentation, but an arbitrage opportunity.

The United States was one of the wealthiest economies in the world, and yet Americans paid less for their products than consumers did elsewhere. It was in fact one of the great ironies of the global economy. Products that retailed in the United States for only $1 in a U.S. dollar store could be found in the developing world selling for $2 or $3, and it was one reason why tourists from poorer economies took their trips to the United States as a shopping spree (just like in Singapore; my emphasis).

Many of the manufacturers with whom I worked realized about half their revenue from just one or two customers from this first market. These customers were either from the United States or Canada, or they were large customers from leading economies such as Japan, Germany, or France. The balance of their business was made up of anywhere from 50 to 100 smaller importers, and many of these were from the second market. First-market importers might generate no profit at all, and a manufacturer’s entire bottom line could, instead, derive solely from second-market customers.

An example in counterfeiting illustrates how some manufacturers took advantage of the arbitrage opportunity in an outright sense: A manufacturer accepts an order for 500,000 pieces from a first-market importer that produces a unique design. Rather than merely filling the order, the supplier keeps the machines running and its people working until it produces a total of 700,000 pieces. The original customer gets his order for a half-million pieces, and then the factory sells the surplus of 200,000 pieces at a considerable markup.

For manufacturers willing to engage in an illicit practice of this kind, it made sense to agree to produce the original order at close to cost. The margin that could be earned on surplus product in some categories easily exceeded 100 to 200 percent, and trying to earn a modest 10 percent profit on the original order might mean losing out to a competitor who would bid lower.

Intense competition was a major driving force in China, and any manufacturer that actually attempted to work out a profit margin for itself on an original order might find a competitor pricing the initial order at cost or sometimes below cost. The uniqueness of the product was what mattered most, and it had everything to do with how aggressively some factories quoted. Some of the smarter importers I have met, those who actually understood how the game worked in China, went out of their way to suggest that their product was unique – in other words, that they had something that might be counterfeited and sold through other channels.

"Walmart Green Push Drives BASF Swapping Crackers for Lab Coats"

From Bloomberg
By Antonio Ligi and Richard Weiss

Oct. 19 (Bloomberg) -- Wal-Mart Stores Inc.’s new line of food containers made from corn starch also hold the promise of a revolution by global chemical companies including BASF SE.

BASF is developing chemicals from bacteria and fungi instead of processing oil derivatives, cutting back on smokestacks that belch carbon dioxide into the atmosphere. Royal DSM NV will start a project by year-end with enzymes to produce succinic acid for car coolants. Mass production may start 2012.

“It’s not voodoo anymore,” said Claus Bollschweiler, a trained biologist who heads up BASF’s research into hydrophobin proteins derived from fungi. “This is a good investment.”

Engineering acids and substances from cells is the nascent part of a biotech chemical industry that’s fueled by demand for bioethanol and set to grow in sales by one-half to 153 billion euros ($227 billion) between 2007 and 2012, McKinsey & Co. estimates. The migration from food, fuels and drugs to basic industrial chemicals is a potential lifeline for BASF and rivals that have struggled to compete with oil-rich Middle East peers.

Bollschweiler’s lab is a dot on the landscape of BASF’s Ludwigshafen headquarters, a 4 square-mile complex dominated by interconnecting pipes, chimneys and plants. The hydrophobins he’s researching can be used for shoe waterproofing or cosmetics that are easier to apply. A venture with bakery ingredients supplier CSM NV to ferment succinic acid will start next year.

‘Reality’

Bollschweiler’s efforts underscore the fallout from volatile crude costs that threaten to return to near $100 a barrel by 2012, according to a Bloomberg analyst survey, forcing chemicals suppliers to seek alternative sources of production.

Sales from industrial biotech-derived chemicals totaled about 230 million euros in 2008, only a fraction of BASF’s 62 billion euros in total revenue. The world’s largest chemical company has spent 135 million euros to research bio-chemicals over three years. Total research spending will be about 1.35 billion euros this year, BASF said in May.

DSM, based in Heerlen, the Netherlands, has closed traditional chemical factories for biotech sites, responding to demands from companies like Walmart who seek more environmentally friendly materials. Procter & Gamble Co., the largest consumer-goods company, is looking for bio-based compounds for diapers to replace acrylics.

DSM’s new succinic acid is produced by the fermentation of glucose in large stainless steel vats, avoiding the need for a cracker that breaks oil and gas down into components like naptha that’s used in plastics and adhesives. The biotech version may cut energy use by 40 percent as well as reduce carbon dioxide emissions, the company said.

Takeovers

“This is no longer just a promise,” Volkert Claassen, head of DSM’s unit developing the acid, said in an interview. “It’s reality. Two years ago we made the strategic decision to sell our chemical production route for succinic acid. We will be one of the front runners. Companies close to the consumer are driving this change.”

Saudi Basic Industries Corp. bought General Electric Co. plastics business for $11.6 billion in 2007, highlighting the move nearer to the consumer by Middle East petrochemical companies. Both BASF and Dow Chemical Co. are exiting styrene markets after inflated oil prices reduced margins.

Crude approached almost $80 a barrel last week on optimism demand will increase amid improved prospects for a U.S. recovery. That’s an impetus to the so-called white biotech industry. The label contrasts with red biotech for medicinal applications, and green biotech for gene-modified seeds.

Price Issue

With oil at $65 a barrel, Novozymes A/S’s enzyme-based acrylic acid in the U.S. is competitive with oil-based equivalents, said Thomas Schaefer, the Bagsvaerd, Denmark-based company’s senior research director. If made in lower-cost Brazil, it would be competitive with oil at $45.

“As a strategist or top manager, you have to think what you will offer in 10 years that is not a commodity and not in complete competition with rivals because then it is a price issue,” said Harald Gruber, a Silvia Quandt Bank analyst based in Frankfurt. “Some day in the future, fossil fuels will become scarce. The oil price will again increase.”

DuPont Co. is looking to broaden its bio-chemical range after creating propanediol by fermenting corn sugar and adding it to fabrics that make carpets and clothes more stain resistant, said biomaterials head John Ranieri. The Wilmington, Delaware-based company’s product pipeline includes thermoplastic elastomers, a rubber-plastic cross used in tubing and hoses.

More Complex, Better

“Four or five years ago, we would have said we are just looking for new specialties products,” Ranieri said in an interview. “Now it’s different, we are looking at all.”

Novozymes will announce two contracts for different chemicals over this year and next, adding to its acrylic acid for diapers. Within 30 to 50 years, biotech refineries will have sprung up all over the countryside, replacing the old-school plants and chemical complexes typically located in ports where the crude arrives, CEO Steen Riisgaard said in an interview.

Wacker Chemie AG is assessing if its success in producing acetic acid, used to make polymers, can be translated into large-scale production, said Guenter Wich, Wacker’s head of biotechnology.

“The more complex the chemistry, the greater the opportunities for white biotech are,” he said.

Kawagoe, Reinventing Lego, Design Thinking

In a departure from reproducing stories in full (which I think actually contravenes fair use policy, shame on me!), I'm only providing the links to 3 interesting stories I read today.



Kawagoe - The vanished Edo



Reinventing Lego - An inspiring business turnaround (and one of the few toys NOT made in China)



Design Thinking - relevant to my job today

"Singapore government will not bail out Las Vegas Sands"

The story is here. And to refresh your memory, my previous post on this is here.

This just gets better and better...

From the story:

"He [Minister of Trade and Industry S Iswaran] revealed that Sands had asked the Singapore Tourism Board to adjust the timelime for the construction of the Marina Bay Sands resort."

As I had expected, one of the requests that Las Vegas Sands would make would be a postponement of the opening date of Marina Bay Sands. The fact that Minister Iswaran has made it clear that a Singapore bail-out is not on the table is suggestive that perhaps Sands had made just such a request.

I'm not surprised that a bail-out by the government is not in the works. Given the resistance by the religious community towards the idea of integrated resorts in the first place, a bail-out would have that community up in arms (which incidentally conjures up a really strange image). In fact, I wouldn't rule out a few inflamed letters by the more religiously inclined in the media or in the blogosphere on how God is punishing the House of Mammon and Filthy Lucre.

As an aside, my sister-in-law works at the Singapore Tourism Board, in the accounting department no less!, and while I didn't probe too deeply, I came away with two things talking to her. First, Sands is in deep trouble (like...duh.) Second, the STB's balance sheet is tiny, so a bail-out even if it occurred, would have to be orchestrated by the larger government.

I know, I know, these aren't exactly blinding insights...but anyways, back to the article:

"Mr Iswaran added there is no reason to think that a large proportion of planned jobs for the project will be lost, although they may be put on hold."

After the play-up of how the Integrated Resorts will help save the economy, this is as euphemistically styled a sentence as I have ever seen. Riiight, after all, a recession is only a temporary bump on the road to prosperity. Tell that to Iceland yah?

"While the government would not participate in any bailout of Sands, Mr Iswaran did not rule out the involvement from government-linked companies, which are commercial entities, if it makes business sense to do so.
'They have to make their own decisions on whether an investment makes sense for them or not. It's not for the government to tell them what to do' Mr Isawaran told journalists."

Oooh, this is most interesting, and I have to admit that it's crossed my mind a couple of times.

The government has now gone on record that they will not bail out Sands. Most people would agree that the Marina Bay Sands project must survive (if only for face), so if Sands defaults and files for Chapter 7 or 11, something must happen to allow the project to continue.

The government is not in the business of running casinos, so an external party must be brought in to manage the project. Who then? Minister Iswaran has said that the government will not strong-arm a GLC into taking on the project, but given the ongoing credit crunch, unless the new project terms are very attractive, and with generous guaranteed financing, no company will want to take on the project.

So how will the project fly if Las Vegas Sands abandons it? Other than strong-arming a GLC, or giving a covert bailout generous financing to a new project manager (I don't think any gaming company is in a very healthy situation right now, Harrah's is a perfect example), is there a third option?

Blueprint for new CEOs

A new CEO frequently gets hired when a company is in the doldrums, is losing money, has been restructured, or is otherwise in trouble. What’s the most common way for a new CEO to proceed in his job?

In order of priority (usually):

Fire a bunch of people. This is also known as downsizing, rightsizing, cutting the fat, rationalizing human resources etc. Personally, I’ve always preferred the moniker of “implementing the corporate catch-and-release program”.

Cut back on the doughnuts and free coffee at meetings. Separately, stinge on the resources that people actually need to do their jobs. Call it an “austerity drive”.

Make excessively huge write-downs and provisions for future losses under the rationale of (accounting) “prudence”.

Manage employees’ and investors’ expectations, emphasising that “we’re all in this together”.

Divest non-core assets and get rid of businesses that are unrelated to the company’s core competencies. Also known as “sticking to the knitting”, emphasise that this improves “cashflow” and “working capital”. Don’t say anything about compromising future growth.

Run down inventories and delay future purchases, making the cashflow picture look better than it actually is.

Blame your predecessor for everything that has that gone wrong. Good phrases to use on one’s predecessor are “lack of vision”, “strayed far from the company’s roots” and “allowed things to get out of hand”.

Concomitantly, take credit for everything that has gone right. Like…duh.

When the economy inevitably stabilizes, “prudently” write back some of the assets and debts that had previously been written off.

Take credit for the turnaround and continue tooting your own little horn.

Start looking for a new job.

*CEOs in Europe may ignore Step 1.

Can you say "Tang Dynasty Village"?

I had mused several months ago to myself that the Integrated Resorts would open just in time for a recession.

Now, it looks like they might not even open at all.

Las Vegas Sands is in talks with Singapore banks and the government. No public information however, is available. The Bloomberg story is here.

Las Vegas Sands is probably asking for any of several things: funding (either debt or equity financing), an extension or suspension of the resort opening date, a relaxation of contractual obligations, or a severe cutback in terms of project scope.

The Singapore government now has to decide whether to invest more money in order to keep this project alive and to recover 'sunk costs (and face)', or to cut back now to avoid 'throwing good money after bad'. An unenviable position that many stock market investors (especially those who trade on margin) have had to make in the last several tumultous weeks.

If Singapore ponies up our (yes, taxpayers') money, then the project (but maybe not the company) will probably survive. Just don't count on it working wonders for our economy.

If Las Vegas Sands defaults on its debt (the likeliest reason will be due to breached covenants and an inability to refinance debt), we can expect:

1.An immediate plunge in the STI

2.Many local companies, especially those in the construction industry, to get crushed under the burden of bad debts traced directly or indirectly to Las Vegas Sands.

3.Lots of work for local bankruptcy lawyers.

4.A sharp fall in GDP and a concomitant climb in unemployment figures.

5.A half-baked Integrated Resort a la Tang Dynasty Village.

6.Huge holes in the balance sheets of the local banks that were part of the lending syndicate to Las Vegas Sands.

7.A general loss of confidence in the economy.