Malaysian Government geared up to cut stakes in some companies, list a few and sell the rest

The Star newspaper reported that the Malaysian Government has identified 33 of its companies as ready for divestment. Under the plan to rationalize the portfolio of government-linked companies (GLCs) in Malaysia, the Government will reduce its stakes in some of these companies, list a few others and sell the rest.

Minister in the Prime Minister's Department, Datuk Sri Idris Jala said that the action plan would involve the paring down of the Government's stakes in five companies, listing of seven companies and outright sale of 21 companies. The move was part of a Strategic Reform Initiative (SRI) to define the Government's role in business so that there would be greater liquidity in the capital market and more opportunities for private investment. Of the 33 companies identified under the divestment programme, 24 would see the exercise affected on them between this year and 2012.

Khazanah Nasional Berhad, the investment arm of GLCs in Malaysia, is the major mover for the divestment exercise. This is an excellent move by Khazanah as it could focus on its core operations and leverage on what it does best. In finance and economics, divestment is the reduction of some kind of asset for either financial or ethical objectives or sale of an existing business by a firm. There are few reasons why the divestment exercise is good for corporations especially a huge corporation like Khazanah.

First, divestment is a form of retrenchment strategy used by businesses when they downsize the scope of their business activities. It usually involves eliminating a portion of a business. Firms may elect to sell, close, or spin-off a strategic business unit, major operating division, or product line. This move often is the final decision to eliminate unrelated, unprofitable, or unmanageable operations. Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable, or promising. Sometimes, such an action can be a spin-off.

Second, a motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.

Last but not least, divesting is to create stability due to maybe a part of the company is under-performing or even failing. Firms sometimes reach a point where continuing to maintain an operation is going to require large investments in equipment, advertising, research and development, and so forth to remain viable. Rather than invest the monetary and management resources, firms may elect to divest that portion of the business.