By P. GUNASEGARAM
IT was due to the advantages of size and economies of scale that Sime Darby and other companies in the Permodalan Nasional Bhd (PNB) stable notably Guthrie and Golden Hope decided to merge some three years ago to form what would be for some time the largest company by value on the local bourse.
It was knocked off that top perch as the market downgraded the share following massive losses at its energy and utility division which gobbled up all the great profits made at its other five divisions – plantations, property, motor, industrial and healthcare.
Yesterday, there seemed to be some support for the share price when its new CEO Datuk Mohd Bakke Salleh announced that the six divisions would soon be put under six different companies with their own boards and corporate structure.
The billion-ringgit question is whether this is a prelude to the effective de-merger of the entity barely three years after they came together and whether Sime Darby should undertake it.
It is clear that the benefits of merger have so far not outweighed the disadvantages. But that is due to a problem of the management, not necessarily the structure.
But if Malaysian companies continue to be devoid of adequate management depth and expertise, it might be better to break the company up rather than risk the whole because of some of the parts.
Sometimes, like now, the sum of the parts is greater than the whole because the whole is being dragged down too much by the losses at one. But at other times, when synergy really works, the whole can become more valuable than the some of the parts.
In Sime Darby’s case it is very clear what happened. The merger brought about a huge conglomerate with great financial prowess – one which could and did take a RM2bil hit and still standing on its feet.
Ideally, that kind of prowess should have been used to get itself good contracts with decent margins. But instead, the strength of Sime Darby was used to get into projects in which it had limited or no expertise – big mistake.
Instead of synergy creating value, we had massive destruction.
Paradoxically, the very size, which was the intention of the merger, got Sime Darby into problems because a relatively much smaller division took risks out of all proportion to its minnow size.
If energy and utilities had been a company listed on its own, would this have happened? Probably not, because no one would have given it a job that big based on its value. And if it had goofed, it would have been only that single company which would have been affected.
Perhaps, seven tenths of Sime Darby’s earnings in a good year come from plantations – that’s where its strength is. The plantations company will still be the largest such company in the world even if it is carved out of Sime Darby and there can still be all the economies of scale to be achieved.
There is a case for keeping plantations and property together because of the obvious synergies that they have – valuable plantation land can become even more valuable when they are used for property development using in-house expertise.
The details of de-merger can be worked out.
It will not necessarily be detrimental to Sime Darby – it could even be good for it, especially in the absence of a strong central core of management at HQ who can value-add the way a conglomerate like General Electric can. But in the absence of that strong central core, there is little reason for keeping Sime Darby a conglomerate.
Certainly, breaking up Sime Darby would cost considerable pain initially but the gain would be a reduction of risk for the better performing units which will get an enhanced value if spun out of the group while the poorer ones will have to stand on their own two feet to get by instead of depending on the mother ship.
But it would take a brave CEO to do that because basically, he will be working himself out of a job. Over to you, Datuk Bakke.
● Managing editor P Gunasegaram constantly reminds himself that up to three quarters of mergers destroy value.