Merger Law boosts consolidation prospects for Taiwanese firms but problems remain

The race to acquire size following the island''s recent entry to WTO, was given a boost last week by the passing of the new Company Merger & Acquisition Law in the Legislative Yuan. Still, any change could be slow.

Under the new Company M&A Law, which still needs ratification by the president in two weeks, companies will be able to use a compulsory share exchange during a transaction. Previously the buyer had to negotiate with each shareholder of the company.

The company can also now approach the management of a target company and request a shareholders' meeting at which time a two-thirds majority would force the minority shareholders to sell. And the law will encourage greater participation by foreign companies since they will be on an equal legal footing with Taiwanese companies.

In addition, M&A will be exempt from the securities trading tax, business income tax and stamp tax, as long as the deal meets with government criteria and merging companies can apply for government loans at low rates of interest.

Observers say the laws are primarily directed at Taiwan's largely ailing traditional industries, in sectors such as textiles, machinery, and petrochemicals. Many of these firms have moved their most productive assets to China, and registered new companies outside Taiwan.

But not everybody is convinced the new law will have a profound impact on business in Taiwan.

"The real issue in Taiwan is a cultural one - in this relatively small and close-knit community, companies are extremely wary of being taken over by another company for 'face' reason, irrespective of any economic benefits that might accrue, " comments Sherry Lin, counselor at law firm Lee and Li.

Hostile takeovers, for which the mechanism is already in place, have been largely absent from the scene in Taiwan for the same reason, adds Lin.

Still, the tax benefits could be a major incentive, points out Spencer White, head of research at Merrill Lynch, Taiwan, and sharply reduce the cost of a merger or an acquisition.

"Cutting costs, since M&A is often a defensive move, could facilitate the process," he says. √°

However, he also does not predict an avalanche of M&A deals this year.

"Many companies in Taiwan's traditional manufacturing sector are now effectively shell companies, following removal of their assets to China, reduces the attraction of takeover," he comments.

"Nevertheless, many of these non-tech companies are very uncompetitive so the choice is stark: merge or (eventually) cease to exist and be thrown to the creditors," he says.

Taiwan, whose economy contracted last year - for the time since the KMT moved there in 1949 - by 2.2%, and whose prospects are chronically blighted by the political stand-off with China, is trying to carry out some fundamental reforms to its economy.

In its efforts to help the island's competitiveness, the government has pushed through a batch of regulations in the last 18 months, of which the M&A Law is the latest. The Financial Holding Company Law, to help consolidation amongst Taiwan's myriad banks was passed in June in 2001

A√°separate set of criteria for M&A for the financial industry was laid out in the Financial Institutions Merger Law, and passed in November 2000. This law allows foreign banks to acquire or merge with local banks. Foreign banks will be allowed to 100% ownership of a local bank.

"The importance of this law is also that it provides the legal framework for the formation of asset management companies which will help local financial institutions better manage their non-performing loans on assets," comments Damian Gilhawley, the top economist at KGI Securities.

Taiwan's banking sector is seriously over-banked, with intense price competition driving profit margins down. Rising 'overdue loan' levels, currently standing officially at 8%, are also damaging earnings. Many analysts say that according to western classification, the true rate of non-performing laons could be twice that.

The Securities Transaction Law was also amended last week to permit Taiwanese companies to float new shares to raise capital without approval from government agencies. In addition, when companies issue corporate bonds, they need no longer get approval from shareholders. And M&A activity will no longer require specific government approval.

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