Mergers and acquisitions seem to be emerging as the newest business area in Sri Lanka's corporate sector.
This also reveals a degree of maturity in the economy which has come about albeit unobtrusively.
So much so, Waldock Mackenzie, the investment banking subsidiary of John Keells Holdings Limited, is focused on using its expertise on corporate finance to specialise in merges and acquisitions.
Waldock Mackenzie, in operation since 1986, originally under the name of Makinnon & Keells Financial Services Limited, is said to be one of Sri Lanka's pioneering companies that offered selected investment banking services.
As CEO Waldock Mackenzie, Ralph de Lanerolle and Director John Keells Holdings, Ajit Gunawardena said, the investment bank has from the inception been in the forefront of Sri Lanka's financial services industry. The fact that the prestigious journal 'Asiamoney' recently ranked Waldock Mackenzie as the leader among lead Manager for Initial Public Offerings (IPOS) in Sri Lanka is "not just a flash in the pan", they say.
Waldock Mackenzie has acted as Manager/Registrar for some of the largest public issues on the Colombo Stock Exchange. Although its advent into underwriting is comparatively recent, the investment bank has already established a strong presence in the business.
According to CEO de Lanerolle, underwiritings to date amount to about Rs. 600 million.
However, the area of business Waldock Mackenzie seems to be keenest on, is specializing in mergers and acquisitions, which according JKH Director Ajit Gunawardena "will become the order of the day" in the future.
Mr. Gunawardena says, 'Takeovers have been happening in the past." Among the deals Waldock Mackenzie has been involved in, is the acquisition of a majority holding in Ceylon Bulbs Limited by Associated Cables Limited and the buy-out of Lambretta (Ceylon) Limited by the Australian Company International Gold and Minerals (Pvt.) Limited.
According to Mr. Gunawardena, takeovers have taken place mostly for the rationalisation of business for greater efficiency and to benefit from economics of scale. "Thus takeovers in Sri Lanka are not really hostile", he said.
Director General Securities and Exchange Commission of Sri Lanka, Aritha Wikramanayake says there is always the chance of mergers and acquisitions for efficiency and you cannot really predict when it will happen. He also feels most takeovers are likely to be "friendly" than "hostile". Yet, again, there is no guarantee. He said it is to safeguard against possible hostile corporate takeovers that the Acquisition and Mergers Act was brought in last year, which quite simply, stipulates all shareholders should be treated alike.
CEO Asia Capital, Ian Hardy says people should not be frightened of mergers and takeovers. "Obviously a lot of mergers and takeovers make good business and there ought to be many of them in a small market like this where private companies and even many of the listed ones are so small,' he said . Nevertheless he feels it will not happen in the immediate future he says Owners and managers have their independent way of doing things and find it difficult to agree on rules and regulations.
He feels it is logical to merge when companies need to penetrate foreign markets or have to incur massive expenditure for functions which would be cheaper as a group.
Mr. Hardy sees grouping of companies in the longer term "but you've got to wait for the right time", he says. According to him, in due course, there is a good chance of a merging of plantation companies where high-cost functions could be shared to cut costs.
There seems to be good reason for the optimism of Waldock Mackenzie about the future of a business which is generally associated with the sophisticated economics of developed countries.
Ajit Gunawardena expects about 60% of turnover to be generated from investment banking. Waldock Mackenzie will be focusing not merely on facilitating acquisitions and mergers, but also on advising corporate clients against acquisitions and mergers when they wish to avoid such situations.
"This is a whole new area of business that is emerging and we intend to focus on it and specialise in it," he said.
Foreign Direct Investment (FDI) in developing countries has more than trebled in the past five years. In 1995 alone it rose by 13 per cent and reached U.S. $ 90 billion to become the single largest source of development financing. This information is contained in the World Debt Tables report recently published by the World Bank.
According to Michael Bruno, Senior Vice-President for Development Economics and Chief Economist, the continuing trend towards globalisation and active reform programmes in many countries suggest a good medium-term prospect for sustained private capital flows to developing countries. The foreign aid component of the capital flows (Official development Assistance from the OECD countries), however, declined by 6 per cent in real terms in 1994 and 1995 remained much the same as in 1994 according to the report, which observes that efforts to protect the poorest countries have been only partly successful and donors need to reverse the present trend. The report adds that an important element of this is adequate replenishment of the concessional arms of multilateral development banks.
As for South Asia FDI set a record high in 1995, increasing by 65 per cent with a doubling of flows to India, states the report. Joseph Wood, World Bank Vice-President for South Asia has observed that "active reform programmes and increasing engagement in the global economy are now paying off in South Asia as seen in the growth in foreign direct investment. The report also points out that private flows are becoming increasingly important in South Asia and now account for close to 50 per cent of resource flows to the region, compared with just over 25 per cent in 1990. The report says that propelling those flows have been the rapid globalisation of production; the increasing integration of the region in buoyant world trade and most significantly, the improved economic policies of the South Asian countries.
Government is expected to authorise foreigners to invest in unit trusts, industry officials said.
This follows a Unit Trust Association appeal to the government, to open up the industry by permitting foreigners to buy into the local unit trusts and also for the unit trust to invest in foreign companies, officials added.
As all four existing unit trust management companies have foreign partnerships, getting foreign investments to local funds will not be difficult, industry sources said.
If the 20 new unit trusts who have applied for licenses from the Securities and Exchange Commission (SEC) are approved, the comparatively new unit trust industry will be broadbased with more money market and real estate based funds, in addition to equity funds coming into the market.
The four existing unit trusts launched in 1991, received a further filip, in the recent budget when a two year extension on tax exemption was granted. The five-year tax exemption on unit trust was to end this month.
Despite the downturn in the Stock Market some of these equity based funds have performed well, taking advantage of fluctuating interest rates and allocating funds with strategic vision.
National Asset Management Limited, (NAMAL), managers of the National Equity Fund which has a 42 percent market share, announced last week at a media briefing, a Re. 1/- tax free dividend per unit demonstrating the consistent ..........performance. Only unit holders whose names appear in the National Equity Fund (NEF) register as at 3.00 p.m. on March 27, are eligible for dividend payments. Those who have made an application for redemption on or upto March 27 will not be entitled for dividend payments.
Those who have opted to reinvest the dividend in the fund will be issued with units in accordance with the trust deed, without being charged the 5 percent front end fee.
NAMAL has now paid a total of Rs. 5.25 per unit on dividends. In 1992 NAMAL declared a dividend of 80 cents per unit, with the income earned during the first 169 days. During the financial year 93/94 two dividend payments amount to Rs. 2/= per unit was declared. In 1995 the fund paid a further Rs. 1.45 per unit dividend.
NAMAL Fund Manager S. Jayawarman said dividend payments were lower this year because brought forward balances from last year were lower than in previous years. The number of unit holders has also increased, making the per unit price lower. This is in additions to the general down trend in the share market which affected the performance of all Funds, which are equity based.
Gross income for the 11 months ended February 29, 1996 was up by 9 percent to Rs. 137.2 mn, compared to Rs. 125.8 mn, in 94/95. The number of units increased from 110.40 mn in 94/95 to 119.6 mn in 95/96. Of their gross income of Rs. 137.2 mn NAMAL paid Rs. 119.6 mn in dividends amounting to nearly 95 percent of income.
Asset allocation as at February 29, 1996, has been 58 percent in equity and 42 percent in fixed income instruments.
Share market investments have mainly been in banking/finance/insurance sector and manufacturing sector. Banking/Finance / Insurance investments as at 30.09.95 were 23.09 percent of total assets, with a market value of Rs. 278.5mn. Manufacturing sector investments were 17.4 percent of assets as at 30.09.95 with a market value of Rs. 210.06 mn. Treasury bill investments were 33.2 percent of assets as at 30.09.95 with market value of Rs. 400.61 mn.
While equity funds are expected to have at least 20 percent in liquid assets, equity market investments are limited to 80 percent of total portfolio. Regulation also limit equity market investments to not more than 25 percent exposure in each sector. Equity Fund investments cannot exceed 10 percent of the issued share capital of any company.
Mr. Jayawarman said while the Equity Fund's net asset value was closely related to their share market investments, the fund was able to cash in on the volatile interest rates, last year.
He added that the lack of IPOs last year, restricted them to secondary market investments. He predicted that although interest rates have fallen during the past month, they will increase during the course of the year, on account of the government's heavy public borrowing. The fund invests in one year fixed income securities, from which good returns are expected in the future.
Before investing in the shares of any company they are subjected to a critical analysis of their financial performance and long term outlook.
NAMAL's outlook is essentially long term, said General Manager, Nihal Dissanaike. The fund's strategic vision in fund allocation, and aggressive marketing have contributed to its favourable performance, he said. The two year extension on tax exemption, will promote further fund mobilisation and expansion to the rural sector, he added.
Director NAMAL and Managing Director, DFCC, of which NAMAL is a subsidiary (associate), praised the integrity of NAMAL executives in managing public funds.
He added that capital investment's International's 121/2 percent equity stake in NAMAL was a further show of confidence in the company, by an International Fund Management Company which manages a $ 150 billion fund.
Kinhill Group, International Director John Gillett is on a tour of Asia and will be in Sri Lanka on April 3.
Kinhill Group is represented in Sri Lanka in connection with the Project Management of the Vanik Headquarters Building Colombo 3.
The Kinhill Group is an international engineering, planning and project management services company based in Australia. It has been involved with the Asian Development Bank in Manila, Sir Donald Bradman stand at the Adelaide Oval, Commonwealth Centre Adelaide, and Parliament House in Canberra.
In Sri Lanka they have set up a joint venture with Demarsean Holdings headed by the young business entrepreneur Desmond van Cuylenberg.
Mike Fordyce is the Project Manager for the Vanik Headquarters Building and Kinhill's representative in Sri Lanka. He has been with Kinhill since 1984, being mostly based in the Brisbane, Queensland office where he was Manager, building structures. In this role he was responsible for the planning, design and project management of a wide range of building types including offices, schools and colleges, university buildings, multi storey car parks, tourism facilities, residential and industrial buildings.
Union Bank of Colombo which began operations in July 1995 has recorded a net profit of Rs. 2 million, a deposit base of Rs. 750 million and assets worth Rs. 1,000 million, its chief said.
Union Bank Chairman Chanaka de Silva said 1995 saw a dramatic change in the country's business activity, which naturally dampened any desire to establish new banking relationships. "The steep rise in interbank deposit rates had an adverse effect on our ability to mobilize deposits at reasonable rates. The delay in completion of the premises - World Trade Centre - to a level where customers are able to have access the bank conveniently, further compounded the problem. Despite these we were able to achieve, and in fact, exceed, the targets which we set for ourselves at the outset, namely, a deposit level of Rs. 600 million, assets of Rs. 1,000 million and a modest profit", he said.
Mr. de Silva said the loan portfolio at Rs. 249 million showed a healthy loan to deposit ratio of 33 per cent. "Profitability alone is not a benchmark for measuring a bank's performance, and it is more so in the first years of operation. We certainly will improve our profit in 1996", he said.
The Chairman claimed that Union Bank, which was incorporated on February 2, 1995 and formally began operations on June 29 the same year, was the bank which grossed the highest profit ever in its first year of operations, in the country's banking history.
"Our focus will be on providing a convenient service to our customers. We have delivered during a short period of six months a number of new products never seen before in this country.
"For example, our 24-hour phone banking service, including automatic fax back facility, permit customers to handle all accounts and cheque related activities from home or office. Our screen phones with smart card technology were introduced for the first time in South Asia during December, and the scheme is of immense benefit to our corporate clients. We also became the first bank in the country to link up with Internet via the Web Server, in January this year", Mr. de Silva said.
The Chairman said in keeping with its theme, 'The spirit of innovative banking', a new Treasury instrument, the interest rate cap, was introduced for the first time in Sri Lanka.
"An Exclusive Discount Office to deal in Treasury bills, the only one of its kind, was opened in Kandy this year", he said.
Mr. de Silva said the focus this year would be on increasing the Bank's presence by opening new branches under Union Bank's Expansion Programme, as well as delivering a range of innovative products and services.
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