- PNB bought the shares of SP Setia in the year 2011 at RM3.868 from the open market. This was before they could take over the company at the price of RM3.9 (Loh,2011). The reason for the purchase of PNB was to restructure the company. According to (Investopedia,2014), Corporate Restructuring is an act of changing the structure of the company in terms of how the company is run, its debt level, and eliminating the problems that are causing significant problems to the resources of the company.
SP Setia is a real estate developer. On the other hand, PNB is real-estate fund. One of the reason of the merger is to make use of the fund in real estate investments. This will help PNB acquire the real estate expertise of SP Setia and use the fund to make real estate acquisitions and development for the benefit of the fund holders. Since, PNB is only a fund, it needed real estate expertise to go with the fund, and that will be provided by the acquired company SP Setia. Another reason was that SP Setia created a negative cash flow in the year 2010. This is an extremely tough condition for a company and a sign that in future the company can go bankrupt. Although, the company was achieving 100% occupancy on its projects, but its cash generating ability was ever so declining and hence it decided to sell the company PNB. The company was unable to pay its interest costs in the year 2010, and generated a negative cash flow from operations. For all these reasons, and waste and lossess in the company, there was a need for SP Setia to sell its stake to owners who can streamlines its affair, and PNB needed to buy a company to further enhance its portfolio in the real estate and use the large fund it already had to make sure that it has some solid investments in the real estate business. It can be concluded that the expertise in real estate was provided by SP Setia, and the money was provided by PNB.
- In the case of SP Setia and PNB, the corporate restructuring exercise will create synergy between the two companies. Synergy is a concept that is used by strategic management to define a situation when the merger of companies yield more results than the added value. For example, let say that the value of both firms is two. This means that the value that should be generate by the merger of these firms should be two plus, four. However, when the value generated by these two firms equals five, it is said that the companies are enjoying synergies. In other words, the funds provided by the PNB and the expertise and guile of the real-estate market provided by SP Setia are going to yield great benefits for the firm taking over the business, PNB in this case.
Another important reason why SP Setia has decided to sell its business is due to lack of liquidity. It has tried to save its position by selling off the business rather than going for bankruptcy due to its reputation in the market. However, it must be noted that the company is in a weak position. It is not generating enough cash inflows from its operations. PNB might not benefit from the takeover unless it streamlines the operations and projects of the SP Setia. It can use its funds to clear SP Setia’s position one time, but if it does not streamlines its operations, the problem is going to put PNB into a dangerous position, and there will be very bad consequence for PNB and the merged business. It is going to gnaw the resources of PNB.
The last reason for corporate restructuring and the merger between PNB and SP Setia is high level of debt in SP Setia. It has failed to meet its debt obligations in the year 2010. This is a dangerous sign. PNB should either reschedule the debt or pays it off in order to make sure that the position of the newly formed company is stable and that it does not face any cash flow and interest payment issues in the future. PNB needs to play really safe in this case. It needs to immediately streamline the debt position of the company and should try to combat the cash flow problems of SP Setia. If it fails to achieve so the future of the company might be in trouble, and not only SP Setia is going to be affected, but it will also affect the overall position of PNB and its group of companies.
Investopedia, (2009). Restructuring Definition | Investopedia. [online] Available at:
http://www.investopedia.com/terms/r/restructuring.asp [Accessed 4 Nov. 2014].
Loh, J. (2011). Archives | The Star Online.. [online] Thestar.com.my. Available at:
http://www.thestar.com.my/Story/?sec=b&file=%2F2011%2F10%2F1%2Fbusiness%2F9611431 [Accessed 4 Nov. 2014].