Two plus two equals eight

ThatÆs what TaiwanÆs latest merger means, according to M&A adviser JP Morgan.

In a quarter where M&A professionals have been weeping into their gazpacho, a deal has at last come to market courtesy of JP Morgan. Not only that, but it was put together in a mere eight weeks. The deal will see Taiwanese consumer electronics companies Teco and Sampo merge to create a giant.

Teco is currently the number one Taiwanese manufacturer of fridges, and is second in air-conditioners and TVs, and fourth in washing machines. Sampo is number one in TVs, third in washing machines, fourth in air-conditioners and fifth in fridges. Together, the companies will have a dominant position in all four sectors and a market share of around 30%. Their main rivals will be the Japanese manufacturers.

Indeed, in a Taiwanese context, the merger of these two bitter rivals is somewhat akin to Sony and Matsushita merging in Japan. The fact that this could happen in eight weeks is a measure of the pragmatism of both companies. The $1.6 billion all-stock deal will see Teco shareholders owning 69% of the merged entity and SampoÆs 31%.

JP Morgan says the two parties came together around Chinese New Year, having examined a host of issues such as ChinaÆs entry into WTO, and decided the deal made sense. Both sides expect to make considerable cost savings, operate with lower inventories, make working capital savings, and be able to pool R&D expenses. The new entity will also have greater pricing power. The chairman of the new company will be TecoÆs existing chairman, Theodore Huang Mao-Hsiung.

ôThe deal came about,ö says JP MorganÆs Kevin Wong, ôbecause both sides realized that rationalization is required. They are being pragmatic and restructuring the sector from a position of strength. This is a deal where two plus two will equal eight.ö

Unusually, JP Morgan advised both companies on the transaction. This almost never happens û except in Japan where it happens all the time û and is a measure of the way both companies entered into the deal in a spirit of trust. Under Taiwanese law, no fairness opinion will be required.

Neither company is dominated by a single shareholder, but both chairmen have stakes, and additionally, Yageo has a stake in Sampo. Coincidentally enough, JP Morgan advised Yageo on its $650 million acquisition of Philips passive components business last year.

The companies have not forecast the exact extent of cost savings, or stated what the companyÆs new name will be. However, two areas of interest for analysts will be whether the new entity will target exports, and whether foreign capital raisings are planned.

It is not expected that the deal will face any anti-trust issues, although experts think it may take up to six months for legal and regulatory issues to be overcome.

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