By Alan Lau
December 11, 2006
Private equity firms are looking beyond the traditional markets of mainland China, South Korea and Japan for deals. Their attention is turning to Taiwan.
What it lacks in the growth of its gross domestic product and sheer market size, Taiwan makes up for in the availability of attractive, "doable" deals. Buyouts in Taiwan are easier than in many places, due to less restrictive policies on foreign ownership. Many Taiwanese technology companies also have a strong cash-flow profile and seasoned management, making them attractive buyout targets.
Valuations are also low, compared to its regional peers. Many expect that the recent bid by the global investment firm Carlyle Group for ASE, the world's largest chip packager and tester, and the acquisition of cable operator China Network Systems by MBK Partners, are only the first of many deals to come. Historically, most analysts have discounted the possibility of buyouts of founder-controlled companies in the technology and financial sectors. Founders are said to have strong egos, no real need to sell and cash out, and a preference to retain control and, in some cases, "pass the torch" to the next generation.
So, what has changed? The key could be in deal structure. Founders of target companies are now participating in the buyouts. By providing capital, private equity firms align their interests with those of the founders, to take full control of the company. They can then extract value together, and create a win-win situation.
What are the benefits of such deals? There are at least three. First, the new private company may not be subject to the progressive cap on foreign investment into the mainland. Second, private companies, now free from the scrutiny of public shareholders, can leverage up for a higher equity return. Many Taiwanese technology companies have the cash profile to do this. A third reason is relative valuation. Many private equity firms have in mind a relisting in Hong Kong or on Nasdaq after the privatisation-a quick value arbitrage.
That is not to say such private equity deals are easy to pull off: the buyout consortium still needs the standard two-thirds approval from the board and the target's shareholders, and approval from the investment commission of the Ministry of Economic Affairs.
Private equity firms also need to pay extra attention to due diligence, which will not be straightforward given the complex legal structure in place to get around the mainland investment cap. But if the ASE-Carlyle deal is approved, it is likely to pave the way for more private equity investments in Taiwan. It will also force a rerating of Taiwan's technology sector.
For those companies whose founders or management still do not feel comfortable working so closely with private equity firms-since buyouts are often followed by staff cuts, which could sit uncomfortably with socially conscious owners-now is the time to think about mounting the right takeover defence. Acting swiftly could mean the difference between controlling one's own fate, or letting in a new investor partner to dictate how the company will be run in the future.
Alan Lau is a partner in McKinsey & Company's Hong Kong office, and co-leads Asia's Corporate Finance Practice
This article was originally published in the South China Morning Post.
