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Fat Times for Scavengers

By IPS Correspondents
29 March 1998

WASHINGTON, Mar 29 (IPS) - Corporate scouts, circling like vultures over Asia, are hunting for economic bargains with a potential for profit.

In the past nine months Asian firms of all shapes and sizes have stumbled and crumbled, first as a result of foreign debts that ballooned as local currencies plummeted then under the weight of international bail-outs that resulted in soaring interest and unemployment rates and falling domestic demand.

Governments, corporations, and citizens are striving to cope with the economic and social fall-out of the region's financial woes - especially in Thailand, Indonesia, South Korea, and the Philippines, which have agreed with the International Monetary Fund (IMF) to undertake or deepen structural changes in their economies.

One of the IMF's central demands has been that countries open domestic industries and financial markets to foreign ownership and management. The benefits of this are supposed to include new inflows of much-needed capital - chiefly in the form of mergers and acquisitions led by Western investors, from multinational corporations to opportunistic 'vulture funds'.

Known colloquially as 'vultures', investors in distressed assets "pilot their funds through the rocky shoals of corporate bankruptcies, buying up depressed bank debt or defaulted junk bonds on the cheap, betting that the turn-arounds of bankrupt companies will increase their value," explains analyst Gregg Wirth.

U.S. investors, who prefer the label 'recovery funds', have assembled resources to invest in distressed Asian companies and other assets that lost value as local currencies fell.

Bankers Trust is reported to have assembled a one-billion- dollar fund. Insurance specialists American International Group (AIG) late last month revealed plans to team up with other firms to raise another one billion dollars. Investors are looking to pool their capital because the investments being eyed are very diverse and spread across a wide area. The opportunities - and the risks - could overwhelm smaller funds, according to market analysts.

These funds are expected to concentrate on acquiring loan portfolios from troubled banks looking to reduce their assets; and purchasing equity stakes in cash-strapped companies that could be restructured and sold as markets recover.

Bank loan portfolios are particularly attractive to distressed investors because they represent an opportunity to acquire substantial debt investments in Asian companies. Later, investors can opt to sell the debt at a mark-up or convert it into equity - or shares - in the companies themselves, depending on how well they perform. One way to drive up the apparent value of a company is to trim its costs - chiefly, labour.

"Despite the job loses that accompany these situations, vultures can hardly contain their glee," according to Wirth.

Investors said 'recovery' was a better label than 'vulture' because their investments were meant to bring moribund Asian enterprises back to life.

"Seeing some of their most ambitious ventures sold off may be a humbling experience for East Asians. But when the restructuring is complete, the rationalisation of overbuilt industries and the influx of foreign capital should put the region on firmer footing," argued the magazine Business Week.

Despite the many risks currently associated with Asian investing, opportunities there were "breath-taking," it declared. Through mergers and acquisitions, "Asia's crisis gives (U.S. companies) a chance to grab strategic ground - on their own terms - in economies still expected to be among the world's biggest growth markets in the twenty-first century."

Business week added that, "with a nudge from the International Monetary Fund, more opportunities may soon be available. The IMF is pushing an overhaul of investment rules in Korea, Indonesia, and Thailand as a condition of financial aid, and that should make more broad restructuring less difficult."

South Korea has promised the IMF it will let foreigners buy land, launch hostile takeovers of domestic firms, and increase their holdings in public companies to one-third, up from 10 percent, without having to seek management approval. Similar concessions could emerge in Indonesia, if President Suharto sees through a commitment to dismantle monopolies held by his family and friends.

South Korea's Samsung Business Group, Indonesia's Salim and Thailand's Charoen Pokphand are among leading conglomerates now looking to boost their liquid assets by selling subsidiaries in industries including automobiles, chemicals, and finance.

Last year, deals in East Asia were few and small and their estimated value - 52 billion dollars - amounted to only three percent of all deals worldwide, according to the trade publication 'M&A Asia'. That could be changing. A recent survey of U.S. and European multinationals found that 64 percent planned to step up Asian acquisitions.

In February, U.S. brokerage Merrill Lynch bought 30 branch offices - and 2,000 employees - from Japan's bankrupt Yamaichi Securities for a reported 300 million dollars. Southern Co. has bought control of Hong Kong power-plant operator CEPA for 2.1 billion dollars. U.S.-based hotelier Marriott bought up the Renaissance Hotels division of Hong Kong's New World Group for one billion dollars. Coca-Cola guzzled up Korean Doosan Group's bottling unit for 432 million dollars.

GE Capital of the United States has acquired all of GS Capital of Thailand, which specializes in auto financing, and 49 percent of consumer financing firm Asian Finance Public Company. Such moves could prove especially strategic - car-makers Ford and General Motors are planning major expansions in Asian automobiles and consumer goods.

Not all bargain-hunters are from the West, however. Prince Alwaleed bin Talal, a Saudi investor, in the past four months has bought stakes in Malaysian car-maker Proton, Singapore's HPL property group, and South Korea's Daewoo conglomerate, or 'chaebol'.

"When Asia comes back, and it will, it's going to be even stronger than it was before this crisis," Alwaleed told the financial press.

Asian firms have been active, too. Hong Kong's First Pacific Co. sold its cellular division to Hong Kong Telecom for 350 million dollars. Singapore's DBS Bank is buying Thai Danu Bank Public and the Philippines' Bank of Southeast Asia.

While investors jostled for maximum advantage from an eventual recovery, Asian workers and consumers had yet to see how foreign and local ownership compare. Also to be seen was how the vultures in particular would emerge.

As a rule, vultures ail when stock markets thrive - because otherwise insolvent companies have easy access to capital either from the stock market or from banks. From 1992 to 1994, relatively lean years for the market, distressed funds enjoyed returns about three times greater than the benchmark 'Standard and Poors 500' index. In the first three quarters of 1997, however, they made about 15 percent, compared to slightly more than 25 percent for the bullish 'S and P 500'.

However, 1998 has brought vultures new hope that "the Asian crisis, or something else, is about to cripple the global economy and make their business sweet again," Wirth wrote in the 'Left Business Observer.' (END/IPS/aa-amy-js/mk/98)