CIMB: Goh Getter

CIMB announces it is to buy G.K. Goh''s stock broking businesses.

After two days of market rumour, CIMB finally announced yesterday (January 13) that it is to buy G.K. Goh's stock broking businesses for S$239.14 million ($146 million).

The deal will see CIMB buy the firm's stock broking operations in Singapore, Indonesia, the UK and the US, as well as the research businesses of G.K. Goh Holdings in Singapore and Malaysia. The deal will add further distance between CIMB and rival Southeast Asian investment banks in terms of size, scope and geographic diversity. The deal will allow CIMB to grow to around US$1.3 billion in market cap, three times larger than UOB Kay Hian and Kim Eng, the next two largest competitors.

The deal will primarily allow CIMB to diversify it business mix, most clearly in terms of geography away from Malaysia. But it will also allow it to diversify its business mix away form its traditional reliance on debt.

Pre-deal, CIMB had 53% of its revenues from debt, 28% from financial advisory and 19% from equity. Post-deal, debt will account for 41% of the total, with equity bringing in 34% and advisory bringing in 25%.

"The acquisition will meet our stated objectives of increasing our exposure to equities overall and retail clients," says Dato Nazir Razak, CEO of CIMB in Kuala Lumpur. "We'll also look to exploit the synergies from this acquisition to deliver better products and services to existing and potential CIMB and G.K. Goh customers, leveraging on the combined regional equities research, corporate finance and other capital market capabilities".

Razak adds that G.K. Goh will provide CIMB with institutional equities distribution in Singapore, Jakarta, Hong Kong and London, including 180 remisiers in Singapore and 12 remisiers in Indonesia compared to the 90 remisiers CIMB has in Kuala Lumpur. Additionally, G.K. Goh 's margin lending book at S$200 million is twice the size of CIMB 's book.

For GK Goh, its brings an end to one of the proudest names in southeast Asian stock broking. Long troubled by the way the broking industry was becoming purely a game of scale, the eponymous G.K. Goh had been looking for a deal for some time. In 2001 he nearly arranged a merger with Vickers Ballas, only to see that bride whisked from under his nose by DBS Holdings.

According to Goh Yew Lin, Executive Director of G.K. Goh Securities, "The combined force of Malaysia's leading investment bank and G.K. Goh 's regional stock broking and corporate finance operations will be able to fully exploit the high growth opportunities offered by the region's fast growing capital markets".

The deal will see CIMB paying G.K. Goh Holdings the full consideration in cash. This will come from two sources - 75% will arrive through a rights issue, initially placed to parent Commerce Asset Holdings Berhad, which will on sell to CIMB minorities.

The remaining 25% of the consideration will come from a combination of internal cash and some Singapore dollar borrowings. It is thought that minority shareholders of both CIMB and GK Goh Holdings will have to approve the deal. The family of GK Goh own 50.8% of the company with the remainder in the public's hands.

In terms of valuation, CIMB is paying 1.35 times book value for the businesses. This is in line with previous comparable transactions. In 2001 Yuanta Core Pacific paid 1.44 times book for 23% of Kim Eng. In 2001 DBS paid 1.2 times book for Vickers Ballas. Last year Eon paid 1.72 times book for Leong & Co.

On a PE basis, the price equates to 13.7 times G.K. Goh's 2004 stock broking earnings, bang in line with the 13.5 times that DBS paid for Vickers Ballas.

The acquisition brings into ever-sharper relief the closer ties that are developing between Singapore and Malaysia, after years of fractious discord. Both stock exchanges are trying to hammer out a deal to allow citizens of each country to trade each other's stocks. It is unlikely that a company with CIMB's connections would establish such a strong Singapore presence without ascertaining that such an outcome was likely.

And yet that history of discord has helped to create a better fit for the merger. The two companies have remarkably little overlap, mainly as a result of the previous animosity between Singapore and Malaysia. The one country where there is some overlap is Indonesia, where CIMB recently established CIMB Niaga Securities, after its parent company Commerce Asset Holdings had bought Bank Niaga in 2003.

The deal is expected to close in three to four months and it is understood that the non-Malaysia business will be called CIMB GK.

Morgan Stanley advised CIMB on the deal, while GK Goh was self-advised. For Morgan Stanley it is the fifth major transaction that it has done for the Commerce Asset Holdings group in recent years - deals that have seen it transform into one of the most dynamic banks in Southeast Asia.

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