examining the need for mergers and acquisitions in the energy sector in malaysia

FOLLOWING GLOBAL TRENDS: EXAMINING THE NEED FOR MERGERS & ACQUISITIONS IN THE ENERGY SECTOR IN MALAYSIACase studies, Concepts, and Debatable Ideas

Kenny OngCNI Holdings Berhad

www.myCNI.com.my www.OOBEY.com

1. M&A Trends in the Energy Sector

2. Rationale for M&As in the Energy Sector

3. Strategies, Structure, and Optimizing Value in M&As

4. Considerations, Risks and Pitfalls

5. Investment Opportunities

• How to fail without trying

The Roadmap to Failureby Fred Wiersema and Mike Treacy

Before we start…

The Roadmap to Failure

Fred Wiersema and Mike TreacyP

Clear Sailing

Today’s performance

Ad-hoc Tactics

Denial & Defense

Doom Projections

Overdue Failure

The Moment of Truth

Performance Freefall

Tomorrow’s actual

performance

Downpresure of Unclear Strategy

Denial and Defense

• “It’s not really good value our competitor is offering, because it doesn’t include a lot of our features.” - ABC vs Air Asia

• “It’s good value but not in our preferred customer market.” - ABC vs Toyota

• “Sure they’re hurting us, but with their unfair advantage, what can we do?” – ABC vs MILO

• “The rules we are playing by have always worked before” – AMEX vs VISA

Clear Sailing

Ad-hoc Tactics

Denial & Defense

Doom Projections

Overdue Failure

The Moment of Truth

Tomorrow’s actual

performance

Ad Hoc Tactics• Selectively hold discounts to hold business that has

started to go elsewhere• Introduce new promotions, terms, conditions, and offers to

confuse and cloud the market• Beef up customer service by adding people to fix mess-

ups and quicken delayed shipments• Delay capital investments and adjust accounting methods

to portray quarterly financial results more favorably• Introduce “new and improved” products that are new in

form, but not in substantive ways that are of consequence to purchasers

• Merge, Acquire, Joint Venture and Ally out of desperation or without proper considerations

Clear Sailing

Ad-hoc Tactics

Denial & Defense

Doom Projections

Overdue Failure

The Moment of Truth

Tomorrow’s actual

performance

“What is the moral of the story?”

1. M&A Trends in the Energy Sector

M&A Trends in the Energy Sector – Malaysia (1/2)

1. MMC purchase of Malakoff, 2007: largest M&A in Malaysia, 2nd biggest in Region

2. Seadrill Ltd (Oslo Stock Exchange, offshore drilling operations) SapuraCrest Petroleum Bhd, raising shareholding from 10% to 18.51%

3. Sarawak Corridor of Renewable Energy (Score) – hydroelectricity, aluminum, steel, oil and gas, glass and agriculture

4. Perisai Petroleum Teknologi Bhd - acquire SJR Marine (L) Ltd for US$42mil, an anchor handling tug (AHT) for US$11.5mil, a portable saturation diving system (SAT system) for US$4.25mil and the disposal of two subsidiaries Corro-Shield (M) Sdn Bhd and Orinippon Trading Sdn Bhd for RM40mil.

M&A Trends in the Energy Sector – Malaysia (2/2)

5. Budget 2008: Stamp Duty exemptions for PLCs and Petronas vendors

6. Budget 2008: Investment Tax Allowance for energy conservation, energy savings

7. Budget 2008: Tax Exemption of income from Certified Emission Reduction (CER)

8. Europe’s ban on Biofuel i.e. Palm Oil

9. Excess capacity

10. “Energy Blueprint” - IPPs to supply at competitive prices to an Energy Exchange

M&A Trends in the Energy Sector

1. Booming Demand

2. Supply shift to remote, unstable locations

3. Environmental impact, Fuel Mix

4. Demand shift in Asia

5. Middle East ‘cheap’ energy = diversification

6. Natural resources depleting fast

7. Massive capital required

8. Supply security

9. Interest in ‘Renewable’ energy

10.Demand reduction and Demand Management

11.Scarcity of Talent: Technical, Projects

12.Global labor market

13.New, low cost players

14.Niche companies in new technologies*

M&A Trends in the Energy Sector

23.Alternative Energy – growth, fragmented*

24.Low R&D, demand for new technologies

25.Anti-Pollution Solutions**26.Credit Crunch27.Foreign entities28.Reliability standards29.Political instabilities30.De-regularization,

Unbundling31.Global Warming, less

Water, less Hydro power

15.Private Equity16.Restructuring

undervalued Conglomerates

17.Record profits, High Prices

18.Antitrust Regulations19.Cross-border

Regulations20.Traditional utilities

consolidation21.Competition for Assets22.Rise of NOCs

Biggest Trend

“Earnings Per Share growth expectations are way above what companies can

achieve in most territories from organic growth alone”

John McConomy, US Power and Utilities Transaction Services Leader, PricewaterhouseCoopers

2. Rationale for M&As in the Energy Sector

Rationale for M&As in the Energy Sector

“Energy companies face a demanding future. They must start

preparing for it now”Ivo Bozon, Director, McKinsey’s Amsterdam Office

Strategies for Growth

1.Base Retention

2.Share Gain

3.Positioning4.Adjacent Market

5.New Business

GROWTH

“Double-Digit Growth”, Michael Treacy

Rationale for M&As: Growth

Expansion

1.Consolidate

2.Geographic

3.Distribution

4.Compensate

Transformative

1.Portfolio refocus

2.Diversification

Easier Tougher

Rationale for M&As: Expansion

Expansion

1.Consolidate

2.Geographic

3.Distribution

4.Compensate

1.Gain Scale to compete

2. Integrated Solutions

3.Financial Growth

4.Supply (security, mix)

5.Developing markets

6.High cost of Extra Capacity

7.Private Equity

8.Expanding NOCswww.myCNI.com.my www.OOBEY.com

Rationale for M&As: Expansion

Expansion

1.Consolidate

2.Geographic

3.Distribution

4.Compensate

9.Remote, unstable locations

10.De-regularization

11.Demand outstrip supply

12.Fuel Mix – Carbon Tax

13.Talent

14.New, Low-cost Entrants

15.Undervalued Big Players

16.Newer Assetswww.myCNI.com.my www.OOBEY.com

Rationale for M&As: Transformative

Transformative

1.Portfolio refocus

2.Diversification

1. New Business Lines

2. Selling/Spin-off non-core

3. Increase product line

4. New customers

5. New technologies*

6. Complementary Business

7. Up-down Supply Chain

8. Patent

9. Convergence anticipation

Rationale for M&As: Energy Sectors

Traditional Utility

AlternativeEnergy

IncrementalTechnology

New Delivery, New Sources, Existing Resources

Oil, Gas, Electricity, Coal

Biomass, Nuclear, Ethanol, Wind, Solar

Possible ‘Outside’ Acquirers or Investors

Institutional

Fund Managers

Corporations

Sovereign Funds

Non-Profit Org

Financial (Loans)

JV Partners

Social VCs

Holding Co.

Gov. VCs

Supply Chain

Gov. Partnership

Competitors

Why do ‘Outsiders’ Acquire or Invest?

1. Return/Profit

2. Risk Management/ Hedging

3. Tax-benefits

4. CSR/Image

5. Diversify revenue

6. Counter-cyclical balance

7. Support ‘Mission’

8. Exclusive rights

8. Contractual obligation

9. National Agenda

10.Control Supply Chain

11.R&D portfolio

12.Control Management

13.Alternative Cash Flow

14.M&A

3. Strategies, Structure, and Optimizing Value in M&As

Strategies for Growth

1.Base Retention

2.Share Gain

3.Positioning4.Adjacent Market

5.New Business

GROWTH

“Double-Digit Growth”, Michael Treacy

How Markets determine Growth Strategies (1)

• Growth Rate

Growth Rate

Strategy Why?

Fast 1. Market Positioning

2. Share Gain

3. Base Retention

•Maintain market share in strategic segments•Prepare for market decline•Competitors focus too much on getting new customers

Flat 1. Base Retention

2. Share Gain (Acquisitions)

•Lose customers slower than competitors•Create scale economics, squeeze costs

• Churn RateChurn Rate

Strategy Why?

Low 1. Share Gain (Acquisitions)

2. Adjacent Markets

•Buying customer base is cheaper than own efforts•New products, old customers strategy

High 1. Base Retention

2. Share Gain

3. Adjacent Market

•Lose customers slower than competitors•Customers are always open to the best value and offer•Desperate to gain revenue

Fast Growth,

Low Churn

1.Market Positioning

2.Share Gain (M&A)

3.Base Retention

4.Adjacent Markets (M&A)

•Energy Sector

• Neutralize Competitor Advantages

• Deliver far better value

• Buy Market Share outright– Price Premium– Operating Model– Integration

Strategy 2: Share Gain

Buying Market Share: Acquisition strategy

IntegrationOperating

PricePremium

Buying Market Share

Net Cost per Customer < Direct Acquire

No evidence of previous company

One Kingdom

Pre-integration Blueprint

Slow Trigger, Fast Bulletwww.myCNI.com.my www.OOBEY.com

Buying Market Share: Side notes on Funding

Preferable OK, but not preferred

1. Cash from Earnings

2. Cash from Borrowings

1. Cash from Stock sale

2. Issue more stock

*Adapted from Warren Buffet’s acquisition strategies

Strategy 4: Invade Adjacent Markets

Adjacent Market = Important Similarities and Large Differences in:

1. Cost Structure

2. Competitors

3. Customers

4. Critical Capabilities

Traditional Utility

AlternativeEnergy

IncrementalTechnology

Upstream Midstream Downstream

DistributionGenerationExtraction

Vendors/Services

• Is it a promising market?– Best when market is new and not stable– You must time your entry carefully– Entrenched companies usually delay

embracing new technology or process

• Can you win in this market?– Must be built on advantages that are tangible,

practical and easily implemented

• Can you match the Standards of Competition in this Market?–You do have to meet the quality level that is

common in the market–Three Standards:- Technology,

Relationships, Business-model–You must have 80 percent of the capabilities

you need to match competitor’s Standards

• Make or Buy?1. It is easier to meet the standards of

competition if you buy an existing player

2. Adjacent acquisitions must remain as a separate enterprise

3. Integrate Management Control (systems, technology)

4. Inter-transfer of management talent, knowledge and capability are important

Strategy 5: Acquire new Business

• No core advantage to bring in

• Investors mind-set vs. Managers mind-set

• Value unlocking via operational improvements

• Invest in Management/Leadership

• Premium = Combined value > stand alone

Revenue Growth

Base Retention

Share Gain Positioning Adjacent Market

New Business

Operational Excellence

Product Leadership

Customer Intimacy

Competencies Information Systems

Motivation, empowerment,

alignment

Financial

Learning & Growth

Internal Process

Customers

Investment Strategy

Productivity Market Value

Linking BSC to M&A Strategy

Optimizing M&A: 4-Wheels Model

Culture

Business

ObjectiveM&A

Strategy

StructureResources

Leadership

Person

Optimizing M&A : Framework

• Org Structure• Job Design• C&B• Policies & procedures• Decision making• Job fit• Management Systems• BSC and KPIs• Decentralized & Empower

Structure

• Role modeling• Vision/Mission/Philosophy• Leadership Style• Delegation & Empowerment• C&B, Promotions• Sense of Urgency• Customer focused• Best practices• Bottom line management• Tradeoff between Cost vs. Value

Leadership

• Identification and Recruitment• Incentives• Training• Values• Motivation• Competency Analysis• Education/Curriculum

Person

Enablers• Projects• Technology• Equipment• Materials• Intellectual

Property• Partners• Property

Resources

Funding (Capital Access)

• Public• Private

4. Considerations, Risks and Pitfalls

Considerations, Risks and Pitfalls

1. Global footprint vs. Local Presence

2. Anti-trust and Regulatory permissions

3. Environmental (e.g. Europe’s ban on Biofuels)

4. M&A Accounting Standards

5. ‘Fair Value’ definition in financial reporting = ‘Exit’ price

6. Acquirer and Target having different Risk Tolerances

7. Public (or Public-hopeful) companies need to consider EPS after acquisition

Considerations, Risks and Pitfalls

8. Synergies and Improvements need to realized as quickly and efficiently as possible

9. Combined Management capability to deliver improved performance

10.First 100 days post-acquisition blueprint

11.Culture management

Consideration: Alternative Deals to M&A

“When companies are unwilling to sell or acquisition premiums are too high, alliances are the next best thing to a

merger. In other cases, they are actually preferable to M&A”

David Hernst, Principal, McKinsey’s Washington, DC

Consideration: Alternative Deals to M&A

Joint Venture

Unite business units

Problem with shared ownership

New Product Lines

Cost Reductions

Share risk, Share Cost in new markets, R&D

Buy-out clause

Alliances Reduce non-core or commoditizing parts

Outsourcing, Offshoring

Help supplier gain Scale

Enter Complementary business

5. Investment Opportunities

Examples

1. Renewable Energy: Wind, Solar, Biomass, Hydro

2. New generation Power Fuel Cells: silicon impregnated with hydrogen, easy to transport wind/solar energy to cities

3. Sun-Wind Generator (Solar Thermal): solar at ground to produce hot air to power turbines

4. Fuel from Carbon Dioxide via Osmosis

5. Heating from Datacenters (Server, Network)

6. ‘Smart’ Electric Grid: capacity optimization without adding coal/gas

7. Energy Storage technology

End Note for Energy Sector

“Globalization, Scale, Profitability”

Michael Hurley, UK Oil and gas advisory leader, PricewaterhouseCoopers

Thank You.

soft copy of slides: www.totallyunrelatedrandomanddebatable.

blogspot.com

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