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SIA and HP — Failed Acquisitions
Op-ed | 13 December 2012
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By: Simeon Ang
Articles (125) Profile

Hot off the press is Singapore Airlines’ (SIA) sale of its 49 percent stake in Virgin Atlantic for US$360 million ($440 million) to US carrier Delta Air Lines. While this amount appears to be big, it dwarfs in comparison to the amount SIA initially forked out.

To give you some perspective, Singapore Airlines bought the stake for US$965 million (about $1,630 million using 1999 US$/SG$ exchange rate). After accounting for inflation and the opportunity costs (opportunity costs are costs associated with “opportunities” that were not pursued because this amount of cash was used in the purchase of Virgin Atlantic) associated with the use of that huge amount of cash, that figure could swell even more.

Without going into specifics, the eventual price – US$360 million – suffice to say, is well below SIA’s initial valuation of its stake. According to Reuters, SIA had previously been open to selling its stake since mid-2011 for a price of around US$500-600 million. Well then, you get the picture.

Bad Mergers – A Bane Of Corporate America
Have companies lost sight of the age old adage of “buying low and selling high”? Surely, Singaporean companies are not alone in this seemingly negative way of unwinding acquisitions, and they are not.

The once mighty, Hewlett Packard (HP) was sent reeling after it announced that it was writing off US$8 billion from its US$11 billion investment in software firm, Autonomy. That write-down has sent HP’s stock, as TIME’s Rana Foroohar puts it, “like a downward slope from one of the mountains near its headquarters.”

Source: Factset, chart on Dow Jones vs HP

The reason for this massive write-down was pinned on allegations of accounting abnormalities as well as failure to make proper disclosures.

Rana goes on to point out that HP’s problems with Autonomy has its roots in wider problem that is plaguing corporate America and possibly Singapore as well. The problem? A seeming “addiction to buying short-term growth at the expense of longer term innovation that can produce profit and jobs.”

As always, Singapore being a laggard to America’s pop culture is seemingly the same in the corporate world as well. SIA’s divestment of its stake in Virgin Atlantic comes after it realised that the rosy picture they had painted to investors just did not pan out. Back in March 2000, SIA had sought to assuage shareholders that the deal would reap good dividends for the company and provide synergies between both companies. Does that sound familiar?

Why? Because almost all acquisitions use “good dividends and synergies” as a blanket rationale to calm investors who feel the buying price is just too high.

Arguably, the recent debacle involving another SIngaporean firm – Olam International, has its roots in the way it carried out its acquisition spree. In its 131 page report, Muddy Waters said that the acquisitions Olam made during its most recent spree have been priced too high. Muddy Waters also mentioned that the rationale for these acquisitions remain weak and unjustified even as the acquisitions were made some time ago.

Spilt milk and what to do with the mess
While it might not be of much use crying over spilt milk, SIA’s divestment of Virgin Atlantic will provide a net gain as SIA had already written off the initial $1.6 billion in 1999/2000. With another $117million to be written off due to preference shares that SIA bought previously, analysts have SIA reporting a net gain of around $322 million. Meanwhile, commercial agreements between SIA and Virgin Atlantic will remain in force.

The net gain will no doubt boost its performance this financial year, the future does however, seem somewhat bleak. SIA’s core business seems to be attacked by various forces both in its traditional premium core (by wealthier Middle Eastern airline companies) and in its economy class (by budget airlines).

Source: Factset, chart on STI vs SIA

Possible move for China Eastern Airlines?
SIA’s foiled bid for China Eastern Airlines in 2008 could be brought up again as SIA assembles a war kitty. That being said however, CIMB feels that the additional cash from the deal will only offer a 10 percent boost to SIA’s net cash balance. It thus fuels speculation that this might not be the only divestment SIA would be making if it really wants to build a substantial war chest for acquisition purposes.

Alternatively, if the cash is used for additional capital expenditures, shareholders could look out for a possible special dividend in FY14.

The future of all that happening and further corporate actions appear to be as murky as the future of the company as well.

Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

Singapore Airlines  9.140 -0.11 -1.19%   
Business: Co provides air transportation services to destinations spanning a network spread over 6 continents. [FY19 Turnover] SIA (80%), Budget Aviation (10.5%), SilkAir (6.2%), SIAEC (3.1%), others (0.2%).

Insight: May-19, FY19 revenue edged up 3.3% to $16.3b. Pass... Read More

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