I had just completed the lecture on how businesses are
financing to their business operations and their vision. This expands my
knowledge span and it is quite interesting to learn how a business can be
beneficial through debt financing or equity financing. As usual, there are pros
and cons in applying one method, a business leader has to make a decision which
method would be the most beneficial to his organisation.
To apply the knowledge I learnt into the real world business
operation, I had looked into the FT newspaper and I have found interesting
article about the recent sale deal between OCBC of Singapore and Wing Hang Bank
from Hong Kong.
OCBC declared all of its buyout would be debt financing. The
lenders are from Bank of American and HSBC.
First I wish to know about how they evaluate the value of a
firm for financing purpose.
In general, a firm may have a number of financial resources
such as common stock, preferred stock, debt and retained earnings. In
purchasing a business always required to evaluate the risk too. In accounting
practice, WACC calculation is used to identify the risk. The above mentioned finance resources of a
firm are the principal means of calculating the WACC. Looking at WACC figure, the decision maker
would understand the healthiness and worthiness of the business.
Analyst views differently on the price offered by OCBC. Many analysts believe OCBC offer price is
higher than actual value. In 2001, DBS bank had bought Dao Heng Bank at the price
of 3.3 times to the book value and the return on investment did not meet the
expectation. The analysts have doubt on the return as it would cost to the
shareholders. Furthermore, the analysts believe OCBC should not pay the high
price as a first time buy out.
Offering higher price
may have some influencing factors behind the scene. Therefore, it is rather going
down to find out the level of offer, I wish to observe the reason of OCBC
decision to finance the buyout in terms of debt financing plus the force behind
to paying high price.
The chosen method will give an opportunity to OCBC for
having more management control and it helps no additional shares to be issued in
raising the necessary capital. But the disadvantage is the interest cost borne
from the borrowed money and the liabilities from the previous owner. The market
rumour saying OCBC will issue stocks to meet the short term loan liabilities. After this rumour, it appears OCBC and Wing
Hang stock prices fell too. In this scenario I wonder about the stock holder in
OCBC. Are they truly benefiting from
the buyout?
The Wing Hang share price fall may benefit to OCBC as its
buy out offering pattern comes 2 time of the book value of the company. However, shareholders from OCBC will not be
benefiting for a short term due to the share price fall and probably by the
loss of dividend. This could be retaining the earnings or sharing dividend to
the existing Wing Hang stock holders and the possible new stockholders.
In addition, offering high price may give OCBC a leading
market position in Hong Kong as well as in China which is a large potential market.
The presence of branches in Hong Kong and China will reduce the unnecessary transaction
charges for the customers who like to do business in China and it definitely
will build the customer trust and confidence. Thus could result the out-performance of the bank which is one of the determinants to bring the share price up. If it
happens, I believe it is a win-win situation for every stakeholders involving
in OCBC, the stockholder, the management and customers too.
Being all the parties involved are financial institutions so
that they have the expertise in financial matter. Certainly it can be expected that
they will carry out the buy out with due diligence.
The real question is OCBC has learnt something from the DBS
bank experience with Dao Heng Bank. Hopefully, OCBC may have a plan not to fall
into the same trap as DBS Bank. It is interesting
to watch whether the deal is successful or not.
Reference:
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