22 July 2009

How Mittal got the better of Arcelor


In January 2006, Mittal Steel, the world’s largest steelmaker by volume, stunned the business community by announcing an audacious bid for Luxembourg-based Arcelor, the largest steel producer by revenue and most advanced technologically at the time. It was a clash of steel titans. Mittal prevailed in spite of much of the European legislative machinery rallying behind Arcelor. Although the Arcelor board and management made many deft moves to ward off the hostile bid, their conduct was questionable. They made decisions without consulting the shareholders.

Mittal took a different tack. It focused on Arcelor’s shareholders, communicating its message of why the merger would be good for them. It went on the charm offensive, wooing political gatekeepers and opinion leaders, conducted investor roadshows and plant tours for shareholders and stakeholders, and mobilised shareholder activism. At the final throw of the dice, Mittal was in a position to bypass the Arcelor board and address the latter’s shareholders directly.

Arcelor, a company that represented the best of European technology and work ethics, was formed through a merger of steel companies in Luxembourg, France and Spain and had a 100-year-old history. Mittal, on the other hand, had grown mainly through salvaging failed state-owned steel companies in second-tier countries. It produced mostly low quality steel whereas Arcelor had modern manufacturing plants in high-labour-cost European countries, producing high-grade steel such as that used for cars.

As Arcelor was in an industry that is often protected by governments as a strategic asset or public enterprise, political leaders and government officials in Luxembourg, France and Spain voiced their opposition, citing job loss and misalignment of economic benefits for the European population.

Mittal’s bid needed the approval of authorities in these countries, Belgium, the Netherlands and the US, where it is listed.

The Arcelor leadership tried every means to block the takeover. It criticised Mittal’s corporate governance, including the fact that the Mittal family owned some 88% of their company and that they held a different class of shares which carry 10 votes per share. Arcelor also tried to lobby the Luxembourg government to write a takeover law in its favour and sway the opinion of the EU Competition Commissioner against the takeover.

Arcelor courted white knights from all over the world. It eventually settled on Severstal of Russia. Arcelor’s board, which, under the company’s constitution, had the power to issue up to 30% of new shares without shareholders’ approval, resolved to acquire Severstal through issue of new shares. Severstal’s owner would get a 32% stake in the merged entity. The merger contract included a hefty break-up fee should the deal not materialise.

The board’s decision would be deemed final unless shareholders holding an aggregate of more than 50% of the equity were present at a shareholders’ meeting and voted it down – an unusually high percentage given that in the past, no more than 35% of the shareholder base exercised their vote. The meeting was not scheduled until more than a month later and after the Severstal deal had been nearly finalised.

The Arcelor board declared an extraordinarily large dividend payout and announced that it would commence a huge share buyback programme sometime in the future after the dust from the bid war had settled. These were defensives measures designed to satisfy shareholders who were keen to cash in on the Mittal offer. The share buyback would reduce the number of outstanding shares and would have the effect of making Severstal’s 32% stake turn 38%, but conveniently, Severstal would not be required to make a mandatory general offer.

Arcelor’s shareholder base was fragmented, with the largest stake being 5.6% held by the Luxembourg government. There wasn’t a concerted effort by shareholders to exercise their collective rights and shareholder activism was not a trend in Europe anyway. Nevertheless, Mittal began mobilising Arcelor’s shareholders. It drafted a letter for Arcelor’s shareholders to demand that a shareholders’ meeting be held within 30 days to allow them to have a say in the matter. Arcelor’s by-laws require a petition from at least 20% of the shareholder base to convene a special meeting. The Mittal team worked the phones and eventually got 30% of the shareholder base to sign the letter.

The Arcelor leadership thought they knew what was best for the company, but with the petition, it soon became apparent to them that a number of their actions had not gone down well, especially with long-term shareholders. Shareholders’ concerns were that, first, the excessive dividend payout would diminish the company’s cash hoard, which could be put to better use for future growth. Second, issuing new shares to Severstal would dilute existing shareholders’ stakes while the valuation of Severstal’s assets to be acquired was questionable as it contained mining assets under less stringent audit regimes.

Third, the smaller Severstal would wield immense control over Arcelor, not to mention the possible influence of the Kremlin over their company, without Severstal having to make a general offer for all the shares or pay a controlling premium. Fourth, a share buyback does not create value for the business. Finally, shareholders were not pleased that the board had made decisions without calling for their vote.

Arcelor was run by steel veterans who endeared themselves to the company and industry and who often forgot their fiduciary duties to shareholders and role as custodians of the company. Although they had performed within their authority, they were overly valiant in defending their fiefdom and many of their decisions were not in the best interests of shareholders. While the Arcelor leadership questioned Mittal’s corporate governance, it had not practised what it preached.

Meanwhile, Mittal focused on addressing the concerns of Arcelor’s shareholders. It pledged to dismantle the 10 vote class of shares. It improved its corporate governance and disclosure in line with global best practices. It drew up an industrial plan that detailed how the combined group would serve the economic interests of their host nations. It communicated its vision of a consolidated steel industry, in line with a pattern of consolidation among its suppliers and consumers. Most importantly, it demonstrated that all this was in the interest of shareholders while sweetening its cash and shares offer.

In June 2006, some 58% of the shareholder base voted down the Severstal deal despite an improved counter-offer, paving the way for Mittal to complete its merger exercise. If Mittal had not engaged them constantly, Arcelor’s shareholders may not have come out in large numbers to oppose the vote, given the protectionist sentiment of the European governments and public at the time. Arcelor’s board would have managed to bring in Severstal through the back door and succeeded in other surreptitious manoeuvres to thwart Mittal, much to the long-term detriment of Arcelor’s shareholders.

Today, the merged entity ArcelorMittal, operating globally and listed on stock exchanges in six countries, is a model of corporate disclosure and regulatory compliance.

The point is, the battle for control of Arcelor was not just a matter of pricing the deal right. Ultimately, it had to make sense in terms of value creation for the shareholders. Throughout the acrimonious fight, the Arcelor leadership had steadfastly refused to consider the merits of the merger, regardless of shareholder interests. At the end of the day, it was Mittal’s attention to investor relations, corporate governance and shareholder activism that won over Arcelor shareholders.

This article was published in The Edge Malaysia on 20 July 2009.

21 July 2009

A benchmark for Malaysian investor relations practitioners

By Rupinder Singh

THE Malaysian Investor Relations Association (MIRA) has introduced the Certificate in Investors Relations of IR Society UK (CIR UK) as a benchmark for investor relations professionals in Malaysia.

As this is the first investor relations (IR) accreditation for industry professionals in Southeast Asia, MIRA has automatically become the first examination centre of CIR in the region.

MIRA chairman Datuk Justin Leong said the certification will help to establish a strong foundation for public listed companies in Malaysia.

"As the Malaysian capital market continues to develop, the roles of IR practitioners are becoming more significant. We hope to produce more professionals who will help demonstrate high competencies in IR to service our capital market," he said at the launch in Kuala Lumpur yesterday. Leong said the contribution of the IR officer to improving the fair valuation of companies would increase over the next few years.

"The IR officer will be the key factor linking the demand for capital by companies on the one hand, and the availability of capital from investors on the other," he said.

Up to 25 candidates have already signed up for the first batch that will sit for their examination in August this year.

Bursa Malaysia Bhd chief executive officer Datuk Yusli Mohamed Yusoff said he strongly encourages all listed companies to enroll their IR officers in the certification learn and benchmark themselves against international standards of IR best practices.

Bursa Malaysia together with the Capital Markets Development Fund (CMDF), established MIRA with the task of evaluating the understanding and practice of investors relations as a key discipline in business strategy and communications.

Deputy Finance Minister I Datuk Wira Chor Chee Heung said the role of IR officers is critical and integral to the country's growth.

He said with greater investor attention, companies have no choice but to pay attention to investors relations to wrestle a substantial share of investment funds.

This news article appeared in Business Times on 21 July 2009.

20 July 2009

Certificate in Investor Relations of IR Society UK (CIR UK)

The Certificate in Investor Relations professional qualification is regarded as an essential prerequisite for those entering the investor relations profession in the United Kingdom. MIRA now offers the same quality of professional development available in the UK to IR practitioners in Malaysia. The CIR is offered in collaboration with the Investor Relations Society, UK’s professional body for IR, highly regarded as a leading authority on IR in UK and Europe (with 80% of companies on FTSE100 on the London Stock Exchange as its members) and among the earliest established professional bodies for IR.

The CIR examination will be held at regular intervals throughout the year, covering best practices in investor relations in the following areas:

1. Introduction to Investor Relations
2. Companies and Regulations
3. Financial Markets
4. Regulatory Environment
5. Accounting Valuation & Investment Principles
6. Practical Experience

The CIR allows IR practitioners to enhance their IR capabilities and benchmark against international best practices. It allows listed companies to identify qualified IR professionals to strengthen their IR function.

The CIR is also an opportunity for development for professionals from financial intermediary roles such as investment banking and equity research who want to make the cross-over into listed companies.

The Investor Relations Society congratulates Eddie Razak on being the first candidate from Malaysia to obtain the CIR qualification.

16 July 2009


An interview with
Dato’ Clement Hii Chii Kok
Executive Deputy Chairman

of Star Publications (M) Bhd

By Eddie Razak, CEO of
Malaysian Investor Relations Association

Dato’, firstly, I wish to congratulate you on the recent launch of Star Publications (M) Bhd's investor relations website. We are pleased to see more listed companies in Malaysia putting greater emphasis on investor relations.

Q: How do you see your investor relations website as part of your overall corporate engagement with shareholders and investors?

A: Star had been engaging shareholders, investors and analysts since our IPO in November 1995 mainly through one-on-one meetings and some group briefings. Our recently launched investor relations website is another platform for such communications but it has the additional advantages of immediacy and reach.

Q: Investors are coming back into the market, albeit cautiously. Do you see this as an opportune time to communicate with shareholders and investors?

A: Whether good or bad times we should be open to communicate with shareholders and investors and various other stakeholders. In fact, I think communication is of great importance during bad times as concerned stakeholders want to know what is happening to our business operations and the impact of the economic environment on the company’s performance and prospects. They don’t appreciate if we only talk during good times and turn off during the bad. It is analogous to being transparent with both good and bad news about the company. This is the essence of good corporate governance.

Q: As a business media that reports on corporate news over the years, do you see listed companies in Malaysia placing more emphasis on corporate disclosure and shareholder engagement?

A: Yes and no. I think there is a tendency for the popular and business press to give more editorial space to the ‘bigger’ names. The same is with the sell-side analysts who tend to pick ‘darling’ stocks. These ‘preferred’ stocks can easily see value in greater resource allocation to corporate disclosure and shareholder engagement. The smaller listed companies may have to do things on a smaller scale. Sometimes the profile of the shareholders and shareholdings influence the level of engagement and corporate disclosure. But with increasing awareness of the need for greater corporate governance there should be more voluntary disclosures.

Q: In your role as both a listed company as well as a market commentator, what would your advice be for other listed companies on their investor relations?

A: First, there must be a buy-in. Boards of listed companies should attach greater significance to investor relations as this is enshrined in the Malaysian Code of Corporate Governance. They should consider various strategies to promote greater visibility about their companies, products or services and business operations. The essence of investor relations is ‘the business tells the story’. A good story needs to be told and the investor relations website is a good channel. Listed companies should make more effort to ‘speak up’ using various media platforms. I suggest they also advertise – about their business products, brands, market position and homepage. It is not only good for business it is good for creating more awareness about the company as an investment opportunity.

This article appeared in the July 2009 issue of BursaBytes, a Bursa Malaysia publication.

06 July 2009

Creation of an investor brand


Businesses depend on customers. Hence, it is important to have a corporate name that synchronises with a consumer brand to make the company recognisable both as a product and a business. For instance, listed company Proton Holdings Bhd carries the same brand identity as its products.

On the other hand, some companies do not have the same corporate brand as the products it carries. Take Axiata Group Bhd, formerly known as TM International Bhd. It is currently undergoing a major rebranding exercise to profile itself as a growth company and thus, different from its former entity as part of Telekom Malaysia Bhd. The new Axiata brand does not represent any product that the group supplies.

Axiata has stakes in a number of operating companies in 10 different countries. Each company has a number of brands for the various products and services it offers. Although fragmented, there is a substantial measure of brand equity under different brand names held by the various companies, manifested in the 90 million customers the group has.

The question then arises: is it worthwhile for an investment holding company to promote its own corporate brand, which is not identifiable with any of its consumer products?

Some may argue that, rather than create a new brand for the holding company, it would make more sense to develop the consumer brands under the operating companies, as the latter is where customers can subscribe for services or buy products. After all, the holding company does not have any direct customers.

However, if the holding company is a public-listed company, like Axiata, it does have “customers” of a different kind. They are the members of the investment and financial community comprising shareholders, retail investors, research analysts, portfolio managers, private equity managers, institutional fund managers, bond market investors and intermediaries, and bankers. In addition, there are the financial media, ratings agencies and market commentators, operating locally or internationally.

In such cases, there is merit in an investment holding company choosing to develop an investor brand targeted at the investment and financial community, as opposed to a consumer brand.

A strong investor brand increases the options that a listed holding company has and its success rate in raising funds through equity or debt. The capital obtained can be channeled to the operating companies to support the specific expansion strategies and growth plans in the various consumer markets. The holding company will be able to optimise its capital base to support the group’s total operations.

The operating companies themselves may raise funds, supported by a strong parent company. In Axiata's case, a few of its operating companies are listed on the stock exchanges of their respective countries.

Axiata has already undergone a massive fundraising exercise with its recent RM5.25 billion rights issue. Although it may seem that its rebranding is directly linked to the rights issue, this was not the case as the rights issue exercise was initiated before the new corporate identity was unveiled. The rights issue was completed successfully due largely to the strong support given by Axiata’s major shareholders.

Fundraising is only one of a number of reasons for Axiata’s rebranding. What it is looking at are the long-term benefits of positioning itself as an innovator and leader in mobile telecommunications, focusing specifically on the burgeoning Asia market.

Much of the group’s business is in high-growth emerging markets covering a substantial geographical footprint, where there is relatively low penetration of mobile telecommunications subscription. Therefore, there are tremendous opportunities that can be exploited through the collective strengths and synergies within the group.

Although there may be inherent volatility in the mobile telecommunications industry and specific challenges in the operating environment in the different countries, Axiata’s investor brand aims to communicate the group’s long-term prospects to the investment and financial community. However, for the investors to better understand the investment merits of the group, the rebranding exercise will have to be accompanied by heightened levels of corporate disclosure, management guidance and investor engagement. The investor brand has to go beyond the visual, psychological and symbolic aspects of the corporate brand.

Axiata’s efforts in communicating its investor brand may not yield immediate results, but in time, market participants will come to understand the investment value proposition that the new brand stands for. One of its desired goals is to see that, in the long run, there will be a higher level of confidence and acceptance of Axiata among investors inside and outside of Malaysia. Also, its long-term objective is to form a broader base of shareholders, command a premium on its share price and have access to lower cost funding in the future.

As it is, the operating companies are retaining their own brands, but they have begun adopting the Axiata icon in their own logos. It is possible that a strong corporate brand may eventually become a consumer brand, which will be entrenched in the minds of both investors and consumers as representing a certain quality and aspiration. Meanwhile, Axiata’s corporate rebranding exercise is a purposeful endeavour and the first step in the right direction towards creating a compelling investor brand.

This article was published in The Edge Malaysia on 7 July 2009.

22 June 2009

Keeping up with the online medium


Public-listed companies will have to set up their own website, which should be current and must contain all their announcements, analyst briefings and other information deemed relevant to their shareholders. These are among the new requirements under the revised listing rules for Bursa Malaysia's new Main Market and ACE Market, which take effect from August 3.

The new rule on websites is a step in the right direction as it is in accord with best practices in mature markets at developed countries. It aims to facilitate disclosure by listed companies and assessment by investors. By virtue of operating in the public domain, listed companies must disclose their corporate information publicly on their websites.

A website is a powerful communication medium for listed companies. It is the most cost-effective mode of disseminating information. Unlike advertising, it does not require major expenditure and does not incur recurring costs. It is an efficient way to communicate with shareholders and investors on a 24/7 basis, and also to reach out to research analysts and fund managers in different time zones. Information can be updated frequently and circulated with speed.

However, there is a disparity among listed companies in the use of corporate websites. Some 20% of the close to 1,000 listed companies in Malaysia do not have a website at all. With the new regulations, all listed companies must close the gap on the use of a website that is sufficiently comprehensive.

The future of corporate disclosure
Corporate disclosure is changing in line with the evolution of information technology. The Internet is moving towards Web 3.0, which has to do with technology that can understand the meaning of data. One of the building blocks of Web 3.0 is XBRL or eXtensible Business Reporting Language.

XBRL is an interactive data format
whereby the numbers in the financial reports are tagged. This will allow the computers to "read" their content and make it easier for people to find and analyse financial data contained in the reports. Data can also be obtained from different sources so that analysis can be made, say, against other companies, industries averages or historical numbers.

The goal of XBRL is "to make quarterly and annual reports computer-readable, allowing investors, companies, finance professionals and academics to sort and access data more efficiently". Besides, global investors can also translate financial statements from any language.

In the US, the Securities and Exchange Commission has recently mandated XBRL filing from June 2009 until 2011. This is a milestone that signals the acceptance of XBRL and the serious intent of the regulators to adopt new technology.

Apart from the US, a number of other countries have started adopting XBRL. In Japan, its regulatory body, the Financial Services Agency, has mandated XBRL filing for all listed and unlisted companies and investment funds exceeding a certain size, starting from the 2008 financial statements. Meanwhile, the Tokyo Stock Exchange has been receiving XBRL financial statements on a voluntary basis since 2003. Japan is among the most advanced users of XBRL. One of the stated objectives of Japan’s push for XBRL is to allow Japanese financial reports to be translated to English, thereby making Japanese companies more recognisable in the global capital market.

In Singapore, the registrar of companies has directed that annual returns be submitted in XBRL for listed or unlisted companies incorporated since Nov 1, 2007. In Thailand, some 29 companies on the Stock Exchange of Thailand are participating in a pilot project to submit their financial reports in XBRL. Other countries following the same path include Australia, South Korea and China.

One country bucking the trend is the UK, which has deferred implementation of XBRL, citing insufficient manpower expertise to support a nationwide migration.

In spite of apprehension in some quarters, it is possible that there will eventually be a convergence of global best practices on the use of XBRL. In all likelihood, XBRL will become the future of corporate disclosure.

We will see the benefits of XBRL when sufficient critical mass of data is tagged and when application software developers come up with more innovative tools for interactive data analysis.

The desired end result is that investors, research analysts, information aggregators, business media, ratings agencies, financial institutions, corporate strategists, economic planners and regulators are able to extract, compile, verify, compute and interpret data in ways that are useful to them. The starting point for this to happen is to have financial reports formatted as tagged data.

In line with this development, we foresee the authorities in Malaysia mandating the use of XBRL in time to come.

As more and more Malaysian listed companies venture out in their quest to become world-class, they will need to keep up with the latest application of web technology. For now, the regulation is for them to at least have a corporate website.

Indeed, the online tool presents opportunities for businesses to develop their consumer market or attract investment capital. Listed companies must exploit the borderless and instantaneous world of the Internet and use their websites to communicate with their shareholders and investors in meaningful ways.

This article was published in The Edge Malaysia on 22 June 2009.

11 June 2009

Ensure investors make informed decisions
Written by Thomas Soon

. . . Zarinah said investor relations should be undertaken by companies themselves with their shareholders. “The SC, through Capital Market Development Fund (CMDF), funds the Malaysian Investor Relations Association (Mira) which has been entrusted with the responsibility of promoting investor relations.”

Read the full text here:
Ensure investors make informed decisions

This article appeared in The Edge Financial Daily on 11 June 2009.

04 June 2009

Making sense of the new IR web reality

By Dominic Jones

This audio slidecast was presented at the “Let’s Get Digital” webinar sponsored by the National Investor Relations Institute (NIRI) on 25 March 2009.

30 May 2009

One-stop shop

  • Bourses increase their suite of services for IROs

  • Stock exchanges team up with suppliers to provide discounted services

  • More exchanges move to offer equity research

By Clare Harrison

Research offerings

Sell-side research has always been a useful tool to help issuers get on investors’ radar. Over the past few years, demand for issuer-sponsored equity research has skyrocketed. But the model suffers from drawbacks such as high costs and concerns over the independence of the research. In recognition of this, exchanges have started offering equity research with varying degrees of success.

In Malaysia and Singapore, for example, research is conducted by an external broker, which helps to improve the visibility of the firms participating in the program. Bursa Malaysia collaborates with the country’s Capital Market Development Fund to subsidize the cost of research by 50 percent.

‘Between 2004 and 2007, a grand total of 303 listed companies and 21 research houses participated in the scheme,’ comments Eddie Razak, chief executive of the Malaysian Investor Relations Association.

Read the full article here:
One-stop shop

This article appeared in IR Magazine in the May 2009 issue.

25 May 2009

Investor-friendly annual reports


The annual report should be investor-friendly, easily understood and serve the information needs of shareholders and prospective investors. It should present sufficient information and illustrative data so that a prospective investor does not have to spend much time researching the company. The aim of the annual report should be to help expedite the investment decision-making process of potential investors.

The annual report is more than a mere disclosure document required for continued listing. It is a powerful medium to convey the company’s investment value proposition.

This is especially important for small listed companies that do not have many avenues, other than annual general meetings, to communicate with shareholders and the investing public. Such companies, which may not be covered by investment research analysts and are either too small to be the radar screen of institutional funds or are not sophisticated enough to solicit investors, should let their annual report do the talking.

There are many ways to present an annual report. Some companies include many pictures of their business operations and happy employees. These do make an impression on investors, but often do not say much about the company. On the other hand, adding a few tables, charts, commentaries and ratios can help make the annual report more interesting.

Here are examples of what some leading companies have included in their annual report.

Tables on changes in share capital
Some companies provide tables that show the changes in their share capital over time. A company may have a share capital of RM200 million today when 10 years ago, at its initial public offerng (IPO), its share capital could have been RM40 million. The number of issued shares and par value may have changed a number of times since the company’s inception. So, how did it get to where it is today?

By providing a chronological table of corporate exercises, say, share placements, rights issues, bonus issues, new share issues for acquisitions, capital repayments, share splits or share consolidation, investors will have an idea of the how the company was capitalised over time. Prospective investors would see the history of corporate activities at a glance rather than having to go through repetitive corporate announcements and figuring things out for themselves.

If, say, at some point there was a share capital reduction, investors who may not have watched the counter for some time would then learn the fact and be pleased to know that the company had made a capital repayment and returned money to shareholders.

Similarly, if there was a bonus issue, the prospective investor would understand that the company had at some point in time accumulated a sufficiently large share premium account that allowed the bonus issue to be made.

Share price activity chart
Some companies provide charts that show their share price movement over a few years, benchmarked against the market index, with descriptions of corporate activities and events.

When the company is dynamic, with many new ventures, markets, acquisitions, contracts as well as challenges, such a chart helps investors understand the impact of economic and market events and business activities on the share price of the company. It also gives an indication of the potential share valuation of the company.

Third-party industry commentaries
Companies often provide remarks on their industry, usually in the chairman’s or CEO’s statement as part of management discussion and analysis. To substantiate the remarks, some companies quote industry authorities (with permission). They include relevant paragraphs or data from various sources for a third-party voice that adds credence to the company. Such information could be from industry journals, rating agency reports, central bank reports, economic reports or market data research reports from local, regional or international sources.

The casual investor may not have access to industry data and reports. By including such commentaries in the annual report, investors get a macro view of the company and its industry. At the same time, the viewpoints show depth in the company’s assessment of industry issues.

Benchmark ratios
Companies often give 5 or 10-year financial highlights comprising the usual top and bottom line numbers. Some go further by providing 5 or 10-year ratios. Profitability margins and return ratios, debt and cash flow ratios, dividends, price-earnings and investment valuation ratios as well as various relevant operational ratios give the company’s investable proposition an added dimension.

Providing a set of historical ratios saves one from having to retrieve past annual reports and crunch the numbers. Although such ratios are available from the likes of Bursa Station and Bloomberg, most retail investors do not have access to such market data aggregators. Benchmark ratios also help research analysts get the indicators quickly.

Investment decisions are not made after just one look at an annual report. Still, a good annual report that contains analytical information in addition to the usual quantitative and narrative disclosures helps increase the chances that a potential investor will study the company further. Of course, investors could do their own research but few have the time to dig deep into one company, especially a small one, unless their interest is piqued. Therefore, it’s better to present a clear picture of the company to investors at every opportunity, and the annual report is one of the best mediums to do that.

This article was published in The Edge Malaysia on 25 May 2009.