The lion awakes

While strengthening its position as a regional financial centre, Singapore has also managed to spur the development of its domestic capital markets. Nick Lord looks at the causes and effects of the growing financial sophistication of the city-state.

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"When I first worked here, Singapore used to be a very nice hotel you lived in at the weekends while you did deals around the region,” says Tommy Tan, head of Asia Pacific corporate finance at Merrill Lynch in Singapore. “Now the situation has reversed and getting the business in Singapore is critical.”

Tan’s sentiment demonstrates one of the most striking changes to have occurred in Asia over the past few years: namely that in Singapore’s efforts to become a regional financial center, the domestic capital markets have mushroomed.

Perhaps the biggest reason why Singapore Inc. now uses the domestic capital markets in a much more efficient and forthright way is because the government has mandated it so. This irony could possibly only have happened in Singapore. The present boom of deals has its roots firmly placed in the government’s attempts to foster a more risk-taking society, attempts only made stronger by Singapore’s reaction to the financial crisis.

In early 1997, the Singapore authorities decided that the country’s financial system needed to be upgraded to compete with other Asian regional financial centres – namely Hong Kong. The government felt that the old, rules-based approach to business and finance that typified Singapore was increasingly irrelevant with the globalization of finance.

To spearhead Singapore’s transition, Lee Hsien Loong – a Cambridge- and Harvard-educated retired brigadier general in the Singaporean armed forces – became head of the Monetary Authority of Singapore (MAS), the de-facto central bank and regulator which has many of the powers of a finance ministry. Lee’s other qualifications for the job were his role of deputy prime minister and his position as eldest son of Singapore’s founding father, Lee Kwan Yew.

Deputy Prime Minister Lee set about establishing a series of committees headed by financial professionals to look at how Singapore was regulated and how it could better position itself to compete in the new era. These committees began meeting over the spring and summer of 1997 and their work coincided with the financial collapse of the rest of Asia.

The fruits of these committees’ findings were crystallized into a speech given by Lee on 4 November 1997 at the celebrations marking the 10th anniversary of SESDAQ. This speech marked a Damascene moment in Singapore’s financial history. Refreshingly candid and honest, it appraised where Singapore stood as a financial centre, and presciently foretold where the country should go. “We need to regulate the financial sector with a lighter touch, accept more calculated risks and give the industry more room to innovate and stretch the envelope,” said Lee. “We need to promote a more competitive, dynamic and innovative environment … the private sector must play a larger role in developing the industry.”

Freeing up of markets

As a result of this speech and changes in policy, a series of new regulations and laws were enacted which aimed to upgrade Singapore’s standing as a regional financial centre and also, crucially, to spruce up the domestic financial sector and the capital markets.

Laws followed in 1998 and 1999 that freed up the hidebound banking and financial sectors. Fund management, offshore banking, domestic banking, domestic bond markets, equity listings, insurance – all these facets of a modern financial system came under the close scrutiny of the MAS and new rules and regulations were developed to liberalize and strengthen them.

Indeed this process is ongoing. At the beginning of September 2000, new rules governing securitization, credit derivatives and internet finance were announced. This shows that the government sees the evolution of Singapore’s capital markets as a work in progress, not as the construction of a finished financial architecture.

The fact that this process occurred while the rest of Asia was struggling through the financial crisis was no coincidence. In many ways, the travails of neighbouring countries, which had strong links between government and the financial sector, strengthened the need for Singapore to carry on the process of de-linking these two pillars of its economy.

It was not just a desire to get its own house in order that drove these reforms, however, for in the crisis Singapore saw for itself a real chance to become the leading regional player in Asia. It has long been known that Singapore is small – maybe too small to survive on its own. There is also a constant rivalry with its brash cousin to the north, Hong Kong – a rivalry that is probably more one-sided than Singapore realizes.

So while the rest of Asia was struggling to pay for the financial messes of a profligate past, Singapore was stealing business from its main rivals, improving on an already steady system and attracting the best talent from around the world to fire up its economy.

The result of this deregulation and re-regulation is that Singapore now stands as the most vibrant and forward thinking financial centre in Asia. But more than that, it has also produced an extremely vibrant domestic capital market.

One of the first areas in which the government sought to spruce up its domestic financial system was in the development of a domestic bond market. Further changes came to the domestic equity markets, the banking system and the appetite for Singaporean companies to explore investment opportunities overseas. 

More public ownership

One area in which the government has had a direct hand in helping to invigorate the local capital markets is by embracing a privatization programme. While this might not be as far reaching as that of Thatcherite Britain, it nevertheless is one of the more forceful in Asia. Stakes in two great companies, Singapore Airlines and Singapore Telecom, have already been sold through IPOs in 1996.

This year three more former government owned companies have come to market. In May, two units of Singapore Airlines – which is still majority owned by the Singapore government – were spun off from the parent company. Singapore Airport Terminal Services (SATS) and SIA Engineering both sold 113 million shares each. SATS was priced at S$2.50, raising S$282.5 million. SIA Engineering listed at S$2.11 a share, raising S$238 million. The sale of both companies was lead managed by DBS and Merrill Lynch. While demand for shares in both was strong, the share prices have not performed well since the IPOs. SATS reached a high of S$2.50 shortly after listing before falling rapidly to a low of S$1.75. It has since recovered to a trading range just above the S$2 level.

The shares of SIA Engineering have performed even worse. The shares have been in a steady decline since listing and are now trading at their all time lows of S$1.67 as of the middle of September.

Despite the post sale woes of these two shares the government has ploughed ahead with its privatization programme. In late July, Temasek – the government holding company – sold a 33% stake in the Singapore Mass Rapid Transit (SMRT). This privatization saw the sale of 492 million shares in the government owned metropolitan railway operator at S$0.62 per share, in the process raising S$300 million.

The government took a market-friendly approach to this deal. By offering 33% of the company for sale in the IPO, the government made sure the stock was liquid. Indeed the free float is much larger than any previous Singapore privatization and as such it was designed to attract international investors.

Furthermore, the price at which the shares were sold represented a price/earnings ratio of just under 8 times projected 2000 revenue. This is a 35% discount to the market average at the time of pricing. In other words this deal was sized and priced to go. The take up of the shares was split roughly half and half between Singaporean and global investors. The deal was lead managed by DBS and UBS Warburg.

“SMRT is now a company that is very lean and mean. All the fat has been taken out,” says Robert Tomlin, managing director of corporate finance at UBS Warburg in Singapore. “And the privatization was excellently done because they [Temasek] allowed a large free float, went for a good pricing model and achieved the optimal mix of retail and institutional investors. It is something of a watershed deal for the Singapore privatization process.”

Eye to overseas investors

The interesting thing about all three deal done this year – and how they compare with the previous privatizations of Singapore Airlines and Singapore Telecom – is that the deals were structured much more with international investors in mind. All three deals this year floated much larger portions of the stock than the two deals in 1996 to give the stocks the liquidity that international investors crave.

Moreover, in the two Singapore Airlines spin offs, the documentation was very much aimed at a Nasdaq audience with specific clauses put in for Singapore investors, whereas with the original Singapore Airlines deal, that dynamic was reversed: it was a stock for Singapore investors to which international investors had to adapt. Now Singapore investors have to adapt to international standards. The shift is profound.

Later this year the government aims to sell stakes in two more companies owned by Temasek. The timings of the IPOs of Singapore Power and PSA Corporation are unknown – as are the sizes of any deals. But it is likely that the government will adopt the same approach to the divestment that it did with the sale of SMRT.

Rules relaxed

Yet the equity markets have not only been driven by privatizations this year. One of the most direct changes to the regulations covering Singapore’s capital market has been a relaxation of the listing rules. This has resulted in much smaller, riskier companies coming to the Singapore Exchange (SGX). “The listing requirements have been relaxed,” says George Lee, head of capital markets at OCBC Bank in Singapore. “As a result we have seen many more small and medium sized enterprises coming to the market than we used to see.”

One change that has boosted the number of new listings on the exchange is that companies now need only have a market capitalization of S$80 million and they do not need a profit history. “We have moved from a merit based regime to a disclosure based regime,” says Tan at Merrill Lynch. “This is a major philosophical departure for us.”

To date some 34 companies have listed on the SGX under the new listing criteria. According to officials at the SGX, the effected changes to the listing rules have enabled these companies to raise finance in ways they could not have done under the old listing requirements. Companies that have come to the Singapore market this year include: iSoftel, a telecommunications software and services company, which offered 56 million shares at S$1.08 at the end of July; and Stratech Systems, an information technology company that sold 66.8 million shares at S$1.10 each at the beginning of August.

The local exchange is not only proving an attractive venue for Singaporean companies to list. Many regional companies are also choosing to list on the Singapore Exchange. They are being attracted by the capital and the legitimacy that a listing on the SGX affords them. “In coming years you will see a lot of companies with a regional stamp come to Singapore to list their shares,” says Richard Seow, managing director and co-head of South East Asian investment banking at Salomon Smith Barney. “The SGX is being very forward thinking in allowing these companies to dual list.”

Foreign companies that have successfully listed their shares on the SGX in the past year include Metechs, Ionics and Delmonte of the Philippines and PK Technologies of Malaysia. So far this year 14 foreign companies have listed on the SGX. As one exchange official recently told FinanceAsia: “Our domestic market is relatively small by global standards, [so] it is pertinent that we develop international appeal as an exchange to attract more regional companies to list here in their quest to attract international capital investment.”

These companies are generally regarded as the leaders in their fields in their respective countries. But because of ongoing financial strains in those countries, the companies find it beneficial to have secondary listings on a major international exchange such as Singapore. This allows the companies to raise international finance. It also allows their foreign investors to be sure that the companies have the necessary disclosure and governance, which perhaps a listing on any other Southeast Asian exchange does not quite afford.

“In the future there will be much more Asian companies coming to Singapore,” says Edmund Lee, managing director of Vickers Ballas in Singapore. “Companies that might find it difficult to raise money on their home exchanges because of the lack of liquidity will instead raise finance in Singapore. That is where the growth in the Singapore market will come from.” Vickers Ballas is one of the main sponsors of regional companies seeking Singapore listings. Companies whose listings Vickers has underwritten include PK Technologies, American Medical Group and Trek 2000.

Too small?

Behind this drive for a regional footprint is the ever present fear that seems to pervade most of Singaporean life: namely that the city-state is just too small to survive on its own. In the context of modern international investors, size appears to be everything. Investors will pay a premium for large, liquid stocks on large, liquid exchanges. As such, Singapore realizes that to increase the size of its exchange it will not only have to get more domestic companies listed but will also have to get regional companies to list on the exchange.

Another manifestation of this size paranoia is the way that established Singaporean companies have been scouting round the world for other companies to buy. Indeed, as an asset class weighted by size, Singaporean companies have been among the most active pursuers of international M&A opportunities in the world over the past few years.

This trend began with Neptune Orient Lines’ purchase of American President Lines in November 1997. This deal signaled that traditional Singaporean companies, with their cheap finance, domestic monopolies and strong government ties, realized that those cushions to competition were no longer good enough. If these companies were to attract international investors, and achieve the requisite growth that these investors demanded, then they would have to shed the comforts of home and head out into international waters. “It is not enough for Singaporean companies to just be big in Singapore anymore. They need a regional or global footprint,” says Salomon Smith Barney’s Seow. “Neptune Orient bought American President Lines to make sure that it was a survivor in the competitive world of global shipping and logistics.”

Singapore companies in a buying mood

This year, the company most active in pursuing overseas M&A opportunities has been Singapore Telecom – albeit with mixed success. Its failed bid early in the year for Cable & Wireless HKT provoked a barrage of comment that the reason it failed was because of concerns over Singapore Telecom’s strong government links. Indeed only 24% of the company is in the hands of shareholders not linked to the Singapore government.

Nevertheless, this setback has not stopped it from attempting a flurry of other deals around the region. In May, it bid for Time Engineering of Malaysia, which has considerable telecom and internet assets. This bid again was unsuccessful – one of the reasons given by the Malaysian company and authorities was that Singapore Telecom was too close to its government.

The company has been successful in other attempts to expand abroad. It has set up a $1 billion joint venture with the Virgin Group to establish a regional mobile phone company in Asian countries where it does not already have operations. It has merged two mobile subsidiaries in the Philippines – Globe Telecom and Islacom. It bought a stake in Bharti Telecom in India for $400 million in June, gaining mobile and fixed line exposure in the country. And most recently it has entered into a partnership with 360 Networks of the US to participate in its C2C regional cable backbone.

These deals and the activity of Singapore Telecom are one of the best examples of the pressures facing Singaporean companies. Sitting on a large cash pile, it has to expand overseas as its domestic monopoly has been taken away. But its close links to the government and slightly stodgy image have sometimes prevented it from closing the deals it wants to get into. But it is still looking, despite the setbacks, and the successes it has achieved with Virgin and Bharti are widely commended by investors and analysts as clever deals, which should help the company increase its return on equity.

Perhaps the most famous Singaporean company is Singapore Airlines. A global leader, whichever way you care to look at it, the company nevertheless is extremely concentrated in Singapore. In December last year, the company decided to use around $800 million of its cash pile to buy a 49% stake in Richard Branson’s Virgin Atlantic Airlines. Over the summer, Singapore Airlines beat out antipodean rival Qantas to gain a 25% stake in Air New Zealand. Both deals gave Singapore Airlines access to earnings that did not originate or end up in Singapore and thus gave it the global diversification of revenue that an airline of its peerless reputation deserved.

Another Singapore stalwart that has been investing heavily abroad is Singapore Power. In the December 1999, the company invested in a combined co-generation and water treatment plant at Seosan in Korea. This transaction was completed over five months and saw Singapore Power invest a total of $236.5 million into the Samsung General Chemicals plant located on the west coast of the country. It was indicative of how Singapore Power wants to diversify not only geographically but also operationally away from the power distribution business that it runs in its home country.

In June 2000, the company completed its largest overseas investment to date when it paid A$2.1 billion for GPU PowerNet – an Australian power distribution network located in the southern state of Victoria. It marked the first time the company had invested in a distribution network and the first time Singapore Power had invested in Australia.

Speaking at the time the deal was announced, Boey Tak Hap, CEO of Singapore Power, showed how the deal was part of the company’s strategy to diversify through overseas M&A. “Our first entry into this mature and de-regulated energy market will offer us the credentials that will stand us in good stead to participate in other mature de-regulating transmission and distribution markets,” he said. “With the coming divestment of all of SP’s local generation assets by April 2001, SP will have to look overseas for its future growth and expansion. SP cannot and should not depend on just our remaining Singapore businesses if we are to be a thriving company.”

Not only are Singaporean companies focusing on merging with and acquiring companies abroad. There is also a steady stream of domestic mergers and acquisitions as well. Mandated by the government, many of these deals are being done to create domestic champions that will have the requisite size domestically to face the challenge of foreign competition at home as well as leading Singapore Inc. out into the wider world.

Failure good sign

Ironically, the failed merger of two Singaporean brokerage houses, Vickers Ballas and GK Goh, shows how the capital markets in Singapore have become the master of corporate fate, not the heavy hand of government. The merger was announced in December last year and was assumed to be a done deal. The major shareholder in Vickers Ballas is Singapore Technologies – a government linked company with the bluest of Singaporean blue chip credentials. The major shareholder of GK Goh is Goh Geok Khim – one of the most highly regarded stockbrokers in the region with a Rolodex that is a who’s who of corporate and institutional Singapore.

Moreover the deal made sense on a strategic level: Vickers has a strong presence in the retail and wholesale market whereas GK Goh has an unmatched position in the institutional market. Finally, with broking commissions set to be deregulated in October, the deal looked like a way for two of the largest stockbrokers to maintain their lead in the face of increasing competition.

However, one reluctant Vickers Ballas shareholder – hotelier Ong Beng Seng – felt that Vickers Ballas shareholders were not getting enough for their company and he challenged the deal. He succeeded by the smallest of margins and as a result the deal was scrapped after an extraordinary general meeting in June.

While the rationale for the deal remains the same and the parties involved are still at the heart of Singapore’s financial system, it was the force of shareholder activism that decided its fate. And as such, the failure of the merger is one of the strongest signs that Singapore has adopted first world financial architecture and shed its protectionist and dirigiste system. “The failure of the GK Goh and Vickers Ballas merger is very symbolic of the new laissez faire attitude that now prevails in Singapore,” remarks Tomlin at UBS Warburg in Singapore.

Looking to the future

Bankers and analysts are preparing for a new wave of consolidation when broking commissions are deregulated in October. Large brokerage houses are expected to either buy outright their smaller cousins or they will continue to cherry pick the best staff from the smaller houses forcing the smaller ones to close. The strongest stockbrokers will be the ones that are backed by a commercial bank. And bankers expect this sector of the financial services theatre to provide rich pickings in terms of M&A advisory fees as the 36 separate broking houses get whittled down to a few key players.

Another area of future business for the investment bankers in Singapore is in helping the local domestic banks divest their non-financial assets. In June, the MAS decreed that all domestic banks have to sell their non-financial interests in areas such as property, logistics and travel. The banks – DBS, UOB, OUB, OCBC and Keppel Tat Lee – will have a window of three years within which to break up their holdings, during which time it will be a fee bonanza for investment banks advising on the deals.

Given the nature of the process, bankers are looking at all the options for the divestment process, trying to prevent a huge asset overhang hitting the market at the same time thus depressing prices. The companies that need to be sold include Fraser & Neave, Robinson’s, Great Eastern Life and United Engineers by OCBC; OUE Hotels and OUB Centre by OUB; and OUL and Haw Par by UOB. DBS is largely unaffected as it had begun an asset disposal programme about two years ago which is nearly finished.

Nevertheless, the size of these collective disposals is huge. OCBC alone will have to divest assets worth S$6 billion to S$7 billion. Once the process is complete, analysts are also predicting a further outcome – the banks themselves could become targets for international players. “The outcome of this process is that it will be much easier for international banks to buy the local banks,” says David Lun, regional bank analysts at the Daiwa Institute of Research in Singapore. “The founding families will own about 30% of the equity and the rest will be in free float.”

A further development bankers expect is that companies will seek to sell more of their shares to the public. With the MSCI widely expected to change its indexing methodology to include weighting based on the size of free floats, this measure of a company’s ownership is likely to increase in importance. “Singapore needs more large and liquid counters to keep it relevant to international investors,” says Merrill Lynch’s Tan. “Investors are quite focused on weightings on the MSCI.”

The largest companies in Singapore need to have large liquid floats in order to attract international investors and the government and owners of the companies are aware of this. “I expect we will see a second phase of privatizations where the government will sell its stakes down to below 50%,” says George Lee at OCBC. “The government realizes that privatizing 25% of a company only gets that company a listing. It is still illiquid. Singapore Telecom’s troubles have shown that it is something of a liability to have majority government ownership – even if the company is good and efficiently run.”

Quiet revolution

The sea change that has occurred in Singapore’s capital markets over the past few years has been remarkable. It has not happened with any great fanfare nor has it been a big bang as has happened when financial deregulation has occurred in other countries. “The revolution has taken place through a series of incremental changes which in themselves are not much, but taken together their impact has been huge,” says UBS Warburg’s Tomlin.

A cause and effect of the capital market explosion has been an increase in the number of creative investment bankers that have come to Singapore. With more bankers visiting companies, laden down with clever ideas and structures, more deals have been done. This process will continue. Impossible as it is to get definitive figures for the increase in investment banking professionals, anecdotal evidence suggests that the increase has been exponential. In 1997, Salomon Smith Barney had an investment banking team of four in Singapore. That figure is now 30. Bankers at other investment banks such as Morgan Stanley and Goldman Sachs say their numbers have increased similarly.

Moreover, investment banking has become core to the success of domestic banks. DBS reports that the biggest single increase in profits has come from its investment banking activity. UOB recently underwent a high-level management reshuffle. The chairman’s son, Wee Ee Cheong, was promoted to second in charge of the group and his background is firmly rooted in the bank’s investment banking division.

Singapore is in the grip of a capital markets love affair. Equity issues abound, domestic bonds proliferate and companies of all shapes and sizes have embraced M&A both at home and abroad. Much of the cudos for engendering this spirit of endeavour has to go to the government. Applause should also be directed at the bankers who have made the deals happen. Yet perhaps the most exciting aspect of Singapore’s capital markets evolution is that this story has only just begun.

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