Monday, November 28, 2011

History Helps

” We must study the present in light of the past for the purposes of the future.”  John Maynard Keynes

One thing that cannot be replaced is a company’s history and background. While one cannot invest in the past, one can learn from it, however very few in the increasingly short-term oriented financial industry have the time to really get to know the background and in and outs of the companies they invest in, and the shareholders that control them.  In “Build to Last” a book by Jim Collins and Jerry Porras, the two authors note that a key trait of long-term successful companies is its history and the values and culture embodied in its history.  Essentially getting off on the right foot, can have huge implications for a business in the long-term.  In the west Coca-cola (125 years old in 2011) is an example.  (FT, Morgen Witzel, 15 July, History Classes that Offer Management lessons for the present and future). This is particularly true of the major or majority shareholders that typically control the larger listed companies in Asia, ASEAN included.   We will illustrate the importance of this through an example.

In 1991 when I wrote my first report on Asian business groups for the old Crosby Group (insert title here) I did it for two reasons.  One was because the same names kept appearing on prospectuses, annual reports, and financial publications.  Secondly, at the time there was little to no organized information on Indonesian companies as, if memory serves me correctly, there was little to no information on Bloomberg and other data providers and no consensus forecasts that may have served as an anchor for the analysis.  My anchor instead was to focus on who owned, and controlled what, and what are the ramifications for minority investors.  I had to write a lot of this down as Indonesian names and spellings were new to me, the Indonesian Chinese had different names including their Indonesian name, and different translations of their Chinese names depending on which dialect they used.  In short it was very confusing, so I had to write it all down and try to connect the dots. 

One key thing I remember was that I thought Sinar Mas’ controlling family the Widjaja’s, were not up to snuff.  Eka had tons of wifes, was taking money away from shareholders in a small chemical company (UIC) to his private companies.  Further, I kept hearing rumours amoungst the Jakarta based business community that the ethnic Chinese businessmen from Medan were not to be trusted (Eka’s family is from there), and that the Sinar Mas group was rumored to not be on the up-and-up.   The sort of Indonesian Chinese family that has little regard for Indonesia , its environment, etc.  They were also involved in the paper business, which survived on Indonesia’s vast forest reserves, and there were ample rumors that Sinar Mas had little regard for the environment.  Despite being a the time the largest business group in Indonesian after the Salims, the key take away from the first report was that the Widjajas are not someone I would trust and that I would not want my fund manager to take anything more than a day trade in their listed companies’ stock.

By 1992 I was no longer covering Indonesian stocks, but instead starting to write research and develop the Crosby Groups business in the Indian subcontinent, later moved into Mainland China private equity; and lost sight of what the Wijaya’s and their Sinar Mas group were up to.

Fast forward to 1998 and headlines about APP, the largest corporate default up to date, and who was behind it – the Wijaja’s.  When I learned of the amount of bond and loan defaults I was truly amazed.  The bankers and investors must have heard the same rumours I had, and either chose to ignore them, or perhaps were forced to loan money to SE Asia as that was the darling of the financial community before 1997.  But perhaps the new-kids-on-the-block bankers did not do their homework on Sinar Mas and the Wijajas, which I suspect is true.  There is no shortage of fresh blood in today’s capital markets.  Youngish analysts keen to make a name for themselves, just out of “B-school” bankers itching to use their family and alumni network to strike a deal, and no shortage of trainee fund managers who do not know or have the time to spend looking into the background of the majority shareholders as their Asian posting may be a 2-3 year stock on the career ladder. 

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