Personal notes: Bloomberg Corporate Focus 2014, 7 August 2014

Personal notes: Bloomberg Corporate Focus 2014: 7 August 2014

Bloomberg Singapore, 23 Church Street, 12/F Capital Square

(live broadcast in Bangkok, Jakarta, Kuala Lumpur, Manila and Mumbai)

4:30pm Executive Dialogue: 

Organic Growth - Is this still the way forward?According to the Bank of America Merrill Lynch 2014 CFO Outlook Asia report, organic growth is the number-one preferred way for CFOs while just 24% will spend it on M&A. How do companies build and manage their talents today amidst the evolving role of the finance function? Is South-east Asia still an opportunity for M&A? How challenging will it be to apply the same talent management model for an MNC into a SME setup?

Panelists:

> Jeremy Gray, CFO Asia Pacific, W R Grace

> Gopul Shah, Head of Global Treasury and Trade Finance, Golden Agri-Resources

> Felix Wang, GM Accounts, Itochu Plastics Corporation

Moderated by Linus Chua, Bureau Chief, Bloomberg L.P.

How has the role of a CFO evolved?

·      CFO role has evolved into to a trusted advisor, business strategist, solution provider and a profit enabler.

o   CFO is also expected to be entrepreneurial and commercially savvy, an excellent leader, relationship builder and an effective communicator.

·    CFO role requires him to (i) leverage information technology - automation and ensure harmonisation, (ii) manage risk, (iii) manage relationships and communications with stakeholders and board, and (iv) drive multi-year long term business strategy.

o   CFOs now are actively engaged in driving multi-year long term business strategy, harmonisation and automation (and outsourcing) of functions, M&A and consolidation, stake holder management (shareholder, capital markets, banks, FI), risk, regulatory and resource management, talent management, and sustainability issues and creating a high performing engaged culture.

o   The skill required ranges from being a general manager with commercial and entrepreneurial acumen, an excellent leader, a people and team player, an effective communicator.

·      Key challenges for CFO’s are setting priorities, managing virtual and global multi-cultural teams, optimising resource and time, and work life balance.

What are the key trends in the M&A scene today?

·     Corporates are now focused on customers, markets; its core strength; corporate agility; and consolidation of business activities or markets. Organic growth still remains a valuable proposition.

o   M&A are now driven by “go to customers and market share”, “consolidation of business activity or market – reducing supply chain activities” or “technology acquisition”. The business activity consolidation helps cost controls, curtailment of activities and brands, or managing regulatory complexities or price risk management. 

·         Renewed interest in Africa, Indo-China, India-South Asia.

·         Sovereign wealth funds and Asian MNC’s are actively seeking M&A opportunities.

o   Few examples: FMCG, electronics, agricultural, banking, metals and mining industry.

o   Resource driven acquisitions examples: Chinese and Indian companies

o   Technology and patent acquisitions. Chinese and Indian companies are acquiring technology for application in their own countries; automobile, computing, telecom, defence.

·     Today debt is not a constraint and come with light covenant and is not expensive which makes acquisitions easy however each company has to weigh its own leverage and cash flows to assume these debt obligations.

·      Organic growth versus M&A: This is company centric strategy and partly influenced by the market sentiment and competitors action.

o   Companies are focused on core business and vision, their customers and supply chain.

o   Cash rich companies are taking M&A routes to (i) deploy excess cash hoard, (ii) buy tax shields, (iii) increase leverage, (iv) diversifying into new business or creating new revenue streams, (v) investing as hedge funds into undervalued assets that could be sold later at a profit, (v) acquiring  new technology, resources, people, culture.

o   There is no right timing as it is company centric and that most companies are always looking for opportunities.

 What are some of the challenges and risks in acquisitions?

·         Valuing the target – ensure there is no blue sky risk

·         Assessing (and managing) tail risks

o   Compliance and reputation risk. Corporates have hidden tax and legal issues, FCPA/OFAC compliance and breach, FX risks.

·         Regulatory compliance prior acquisition. Example: competition commission approvals in multiple countries.

·         Integration and cultural challenges.

·         Cross border funding and debt funding.

·         FX risk on investments in emerging market

What lessons can you draw from your recent M&A activities?

·     Valuations in emerging markets could be unreasonably priced by the exiting investor (it is an expectation of exiting investors). You got to check on the expectation ahead of time so if the price is not right walk away! No point in investing what cannot be negotiated to a reasonable NPV of the target.

·     Managing compliance and reputation risk in emerging markets can lead to hidden costs and could be legally protracting impacting business and sentiments in the company.

·      Integrating people, process, systems and culture of the target can make a big difference in realizing the potential benefits.

·      In order to realise full potential and fix accountability on realising the value of the target, the integration manager (or business manager) must be same as the ‘business development manager”.
. Mergers and acquisitions are like 'marriages'; success requires both parties to accommodate and adjust. The best strategy for both acquirer and target is to learn from each other.

Have the regulatory hurdles in this region really improved? Has the environment become more conducive?

·  Slightly improved - there is cautious optimism! Hurdles will remain, every regulator is trying to increase tax revenues and enhance compliance around money laundering.

·   Despite risks corporates are undeterred by M&A as the potential for long term business viability and growth has overwhelmed risks considerations. Structural changes to the economies in this region are still happening.

What markets offer the most opportunities?

·    Markets that offer low political risks, transparency, discounted valuations and higher long term growth and returns.

o From a resource and consumer growth perspective, Indo-China, India-South Asian block, Africa (pockets), and Indonesia.

o From a talent perspective, low cost and back office initiatives - Philippines, India, China, and Malaysia.  High end initiatives – Singapore, HK, Australia

o Technology perspective it is US, Korea, Japan, Germany, and India. Of course, specific technological applications can be found in multiple locations.

What's the outlook for talent management? Has it been easier/more difficult to retain talent today (looking at factors including the economic outlook and unemployment rate).

· More than 60% employees in Asia are seeking a change which isn’t correlated to the economic or employment growth story.

·  It appears that employees are seeking better opportunities to match their passion; seeking conductive work culture and compensations.

·  These are corporate challenges that could be addressed via employee retention and hiring by providing the right leadership and management, work culture, market compensation, and challenging opportunities to employees.
.   Majority of the SME employees are happy to learn and embrace MNC talent management model and work culture however some employees that are not used to an open, transparent and inclusive system face obvious challenges and often leave the company. 
. After an MNC acquires an SME, the business manager(s) face a different challenge which is around increased cost of doing business and lower profitability (impacting their incentive plans) arising out of overheads and shared service costs allocation of MNC to the SME business. SME's do not have MNC related overheads and share service costs so whenever an SME acquires a division of an MNC the target's profitability increases with disappearance of the MNC cost.

An orchestra builds on a good partnership, produces the best music!