IFLR Taiwan M&A Summary
July 20, 2007
Introduction
As Taiwan heads into an election year in 2008 and beyond, market observers may look back at the last 12 months as an important watershed period for the modernization of Taiwan’s financial sector. There is abundant and growing interest from foreign investors, particularly private equity investors, and mergers and acquisitions, together with other domestic and cross-border deal-making, are at an all time high. The important developments which have occurred in Taiwan, however, are built on important changes and attitudes which have been introduced since the formation of the Financial Supervisory Commission, and further shaped by the regulators’ reactions to the opportunities in the market which have been opened due to such changes. As the changes which have been introduced by the government are too varied and numerous to discuss in any sufficient detail in this article, we will focus instead on the principal factors which have affected the record-breaking deal-making in Taiwan.
The Second Financial Reform
In 2005, President Chen Shui Bien initiated the second financial reform program, a center-piece of which is the reduction of the total number of financial holding companies and banks in Taiwan. Taiwan banks over the years have been plagued by over-competition, which has encouraged on the one hand price cutting which resulted in poor service and internal controls, and on the other risk taking and unsound credit policies. In the first financial reform program, the government aimed at reducing the significant NPLs in the market, and as that first phase came to a close, the government aimed to improve services and health of local commercial banks by encouraging consolidation. In the same year, the Financial Supervisory Commission (FSC) was established to become the central regulator of banks, insurance companies, securities firms and the capital markets in general. The establishment of the FSC ushered in numerous regulatory changes and, perhaps more importantly, a willingness to facilitate deal-making in the interest of furthering the consolidation of the banking sector.
Although the second financial reform program and the FSC was roughly modeled after the experience in South Korea, the inherent factors for banking in South Korea was not present in Taiwan as Taiwan banks, while in trouble, were not as distressed as their counterparts were. Therefore, to encourage deal-making, the first term commissioners of the FSC had to rely largely on their own – i.e. regulatory changes and more dialogue with the market. There were at least three very important sets of changes initiated by the first term commissioners of the FSC, the effects of which are being seen quite clearly in the markets today: (1) encouragement of dialogue between market participants and regulators and growing experience in deal-making, (2) relaxation of investment and financing restrictions to allow more sophisticated financing structures, and (3) more emphasis on enforcement and monitoring of corporate governance and insider trading.
A Buoyant Deal-Making Environment
The willingness of the Financial Supervisory Commission to interface with market participants culminated ultimately in the ground-breaking takeover by Standard Chartered Bank of Hsinchu International Bank. This was the first ever takeover by a foreign institution of a Taiwan bank, and Standard Chartered leapfrogged many of its competitors with the deal.
The takeover by Standard Chartered Bank of Hsinchu International Bank served as a catalyst in many respects. First, the premium paid by Standard Chartered Bank was a jolt to the market and provided further evidence that listed companies in Taiwan were being undervalued compared with other jurisdictions. At the time of the announcement of the takeover just nine months ago, the Taiwan Stock Exchange composite index was less than 7000, and the index has gained almost 40% since (not coincidentally, the composite index figure at the announcement date is still the 9-month low). Second, the takeover employed numerous legal and deal-making techniques which had been previously dismissed as too complex and innovative, but when such techniques were successfully executed, other firms began to follow suit. Third, the takeover not only resulted in the most successful takeover in Taiwan, it was also a watershed in that it resulted in the delisting of Hsinchu International Bank. The delisting of Hsinchu International Bank, which requires the approval of the Taiwan Stock Exchange, was a signal to the market that the Taiwan Stock Exchange and the FSC are both open to going private transactions.
Following the Standard Chartered deal, numerous takeovers were initiated, most of which were successful. Additional deals have been approved since then which represent further developments in terms of deal-making sophistication, including the first foreign-led leveraged buyout of a Taiwan listed company. Overall, the execution risk for undertaking significant mergers and acquisitions activities has been greatly decreased because of the growing experience from these transactions.
Growing Financial Sophistication
In addition to the growing list of successful large-scale mergers and acquisitions transactions, the FSC has also continued to enable better deal financing structures which help both the local economy as well as foreign investors. For example, as of November 15, 2006, foreign nationals and overseas Chinese investing in Taiwan securities are allowed to borrow New Taiwan Dollar (NTD) loans from domestic financial institutions. This new provision is an exemption from the restrictions of Article 21, subparagraph 3 of the Regulation Governing Investment in Securities by Overseas Chinese and Foreign Nationals that would otherwise prohibit extending loans or providing collateral. Since interest rate on NTD is low and the government is wary of additional weakening of the NTD due to increased inflow of US dollars, enabling more borrowing of NTD for acquisition purposes seems to be a win-win situation. These loans have been utilized in the most recent takeover deals which represent the first leveraged buyouts in Taiwan. These M&A activities, in turn, have served to educate and provide valuable know-how for domestic banks on how to structure sophisticated term loans. So far, these NTD loans are not open to use for working capital and refinancing purposes – further regulatory changes in this area could set off a banking boom in Taiwan.
Corporate Governance and Enforcement
Another welcomed development is the increasing attention on corporate governance and enforcement introduced by the first term commissioners of the FSC and which are now beginning to show its effects. In terms of corporate governance, the requirement for listed companies to have independent directors on its board of directors took effect this year, and this development, together with the increased mergers and acquisitions activity, have resulted in growing shareholder activism in Taiwan. In addition, at least to the observation of this firm, the regulators have increased their focus on conflicts of interests issues and in many cases have required public disclosure of board abstentions due to conflict of interests concerns of significant board approvals (for example, with respect to an approval or recommendation of a takeover offer). Finally, regulators have been especially active in pursuing insider trading cases as mergers and acquisitions activity has increased. These developments should be welcomed by all investors as these will improve investor confidence and further upgrade Taiwan’s stock markets and financial sector.
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