Friday, 12 August 2011

GLCs need to create value and enhance their stakeholders’ wealth.

GLCs are controlled by the Malaysian government via the Government-Linked Investment Companies (GLICs). GLICs are investment arms of the government that allocate government funds to the GLCs. In addition to having ownership in GLCs, the Malaysian government also has an influence in the appointment of members of the board of directors and senior management positions. The government also has a controlling stake in making major decisions-e.g. contract awards, strategy, restructuring and financing, acquisition and divestments. As such, government intervention in GLCs is common not only in Malaysia but also other countries. The issue is, does intervention by the government creates value for GLCs?

Research findings suggest that there are two opposing schools of thoughts.  According to the first, companies with government intervention are better governed (Ramirez and Tan, 2004; Ang and Ding, 2006). More specifically, these companies are not only under the watchful eyes of the public, i.e. namely investors and shareholders, but also the government. In contrast, the second school of thought belief that companies in private hands are more competitive and have more incentive to innovate and contain costs ( Dewenter and Malatesta, 2001; Sun and Tong, 2002).

A recent research by Lau and Tong (2008), published in International Applied Economics and Management Letters, found that government intervention improves firm value. Results of this study provide preliminary evidence on the effectiveness of the ownership and control structure of Malaysian GLCs in creating shareholders’ wealth. Such finding is consistent with the government’s aim of building up the nation through GLCs. The Malaysian government’s priority is economic development. In order for GLCs to contribute towards the country’s economic development, GLCs need to create value and enhance their stakeholders’ wealth. 

Thursday, 11 August 2011

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.