Monday, October 17, 2011

What ails the GLCs?

I have been reading all the chatter about GLCs (both Malaysian and elsewhere) and their travails. Many who take a macro view are peeved that GLCs, being large corporations with the backing of sovereign governments, have an inside track to plum projects and deals. These inside tracks and opportunities have a perceived cost because they are done at the expense of depriving privately held corporations (as opposed to those that have government or statutory shareholding ownership) of the opportunity to bid for the plum projects and deals.

Another peeve is that GLCs are often in serious and earnest asset-shuffling mode. Often, these asset-shuffles aka "mergers and acquisitions", result in 1+1=1 instead of 1+1=3 or more in value creation. In other words, there are seldom any true synergistic benefits arising post-merger or acquisition.

Truth be told, this applies not just to GLCs, but also to many large corporations.

There are many examples of these disastrous corporate exercises. The Time Warner and AOL deal is probably the all-time classic example. Closer to home, the example would be the great Sime Darby merger.

So, here we have 2 basic issues-

First, the allegation that GLCs "crowd out" the private sector.

Second, GLCs are merely shuffling assets and playing a game of stacking numbers i.e. shuffling assets and cashflows between and amongst different corporate entities to produce a financial result that shows higher profits and greater valuations.

The first issue is obvious. So, I'll just leave it there.

The second issue is more interesting to me. Let's try to taxonomise them.

I see 2 types of large publicly-listed corporations, GLC or privately-held.

Type A is a corporation that thrives on asset-shuffling and, mergers and acquisitions.

There are 2 kinds of Type A corporations.

Type A-1, are corporations that conduct asset-shuffling, mergers and acquisitions within a clearly defined core business. These corporations try not to stray outside their field of expertise. Rupert Murdoch's News Corp is a good example of this. That said, News Corp screwed up big time with Myspace, acquiring Myspace's parent company, Intermix Media for USD500 million in 2005 and recently selling it for a paltry USD35 million. Nevertheless, the constant asset-shuffling, mergers and acquisitions give market investors paroxysms of orgasmic highs and cold turkey lows. It's a combination of thrills and fear. Like riding on a roller-coaster.

Type A-2, are corporations that conduct asset-shuffling, mergers and acquisitions with an assortment of businesses. There are many Malaysian privately-held corporate groups that do this. I shall not name them. And, then, there are the institutions that own the GLCs such as Khazanah Nasional and PNB.

Type B corporations are more honest-to-goodness, stick-to-what-you-know-and-grow types. Apple is, of course, the sexy example.  Another is IBM. 

Most of the criticism is levelled at Type A-2. 

The key issue is how well the drivers of corporate deals understand the core business of these corporations.

Throughout the world, not just in Malaysia - many, many large corporations, not just GLCs - are now led by finance men. These are numbers-crunchers. These are people who only look at numbers and how they stack together. These people do not see businesses, business history or people. They only see numbers. They are like the evil twin of Neo in the Matrix Trilogy.

Why is this a concern?

Well, the concern is that these finance men do not know how to manage core operations. Many of them don't believe that it is necessary for them to learn business operations. Many of them believe that the numbers are all that matter.

What is the market share today? How does it compare with the last quarter? What is the projected market share in the next quarter?

What is the pre-tax profit today? How does it compare with the last quarter? What is the projected pre-tax earnings in the next quarter?

What are the trade receivables today? How does it compare with the last quarter? What is the projected collections in the next quarter?

What is the inventory today? How does it compare with the last quarter? What is the projected inventory in the next quarter?

Reams of excel spreadsheets are generated. Lots of score cards are prepared. Numbers. Digits. Plus. Minus. Percentages.

To be fair, the same questions that the finance men ask are equally asked by business leaders who worked their way up from operational ranks. 


But, the comprehension and insight offered by these numbers differ markedly between the finance men and the business leaders who were involved in the core business - whether from the production side or the sales department.

I have nothing against finance men. Some turn out to be great business leaders. Many others turn out to be the investors' greatest nightmare.

It may be that the excessive presence of finance men - who have no clue about the core business, the human capital in these businesses and the future potential of the businesses - is the factor that ails the GLCs.

I may be wrong. 

But, I don't think I am.

The remedy?

Don't discard willy-nilly the homegrown career managers. Give them a fair shake at leading the core businesses.


Anonymous said...

This write-up reminds me of the formation of MMC.

That mamak forcefully congregated almost all the big tin mining companies listed on the KLSE into MMC - the largest tin-mining conglomerate in the world then.

A superlatives that described MMC could be found now on describing SimeDarby & Feldas Global!

Now, what MMC stands for? More so been converted from a GLC to a privately held ATM.

Tin mining? Who care about that sunset industry that M'sia used to rule the world.

Compared the current price of tin now, this description of 'sunset industries' is just a poor excuse. Like rubber plantations, coal mining etc, sunset is indeed a misnomer! a good excuse for nincompoops to play out their incompetence.

Similar fate await SimeDarby, MSM, Felda Global etc.

Just wait & see.

walla said...

While waiting for DPP to stride in on Dr Martens, i'd just make a small comment if it is not deemed too tongue-in-cheek.

Scratch all of them and out pops the constant objective to be-all-do-all like running before walking on the need to catch-up without seeing it is finishing the course with minimum financial exposure which is the real goal.

The excuse is if not tried, how to learn? The real result is even after trying, nothing has been learned because the same mistakes are repeated elsewhere to at least the same magnitude with the blessing of political puissance, furthermore with blank cheques in bailout made easy on the score it is just public money to expand communal presence with business objective and stakeholder interests as minor agendas.

The maturity and capabilities of the oarsmen also leave much to be desired. Which is why most of the ships have sunk or are at best anchored in the harbour.

But then that's where ships whether they have been carved from one block or welded from cut-off parts are not made to be.

It is noted all the ETPs are in essence property plays. That speaks volumes of the development and relevance of our human resource whose pallbearers have been informed.

So you have GLCs playing hide-n-seek with their flashy accounts and corporate moves, occasioned by CEOs saying nothing of substance, in an economy just brick-laying around under the umbrella of a government working hard to fumigate its auditor-general's report so soon after easy dispensations to fixed-deposit voters cohorts before prospect of another five years of whiskey tango foxtrot.

Shall the court recess, your honour?

flyer168 said...

Hi de minimis,

It has been a long time & hope all is well with you & family.

"What ails the GLCs?"

Thought I'd share this...

Meltdown - The men who crashed the world

The men who crashed the world - Meltdown - Al Jazeera English -

The first of a four-part investigation into a world of "greed and recklessness" that led to financial collapse.

You be the judge.


de minimis said...

flyer168, it is always wonderful to have you drop my. My family is all in good health and good spirit. Thanks for link.

de minimis said...

bro walla, it's always good to read your curling views.

Anonymous said...

Just spoke to an influential GLC head honcho.He laments the lack of "liberal arts" grads who can talk concepts n articulate them forcefully.

Engineers are easy to is as good as the next one.Nothing creative about them and strictly in the box thinking.

Sadly,thats where we are.