Of Sime, the GLC plan and size
If you think you should not be bothered about what is happening in Sime Darby Bhd (4197), think again. Do you invest in Amanah Saham Bumiputera, Amanah Saham Malaysia, Amanah Saham Wawasan 2020, or Amanah Saham Didik?
Permodalan Nasional Bhd (PNB), through these unit trusts that it manages, holds about 41 per cent of Sime according to its 2009 annual report. PNB also holds another 13.2 per cent directly.
If you have savings in the Employees Provident Fund, the pension fund holds about 12.43 per cent while Lembaga Tabung Haji, the Muslim pilgrims savings fund, has another 1.82 per cent.
What this means is that these investment funds could be affected by losses in Sime. If the group's profit shrinks, it may not be able to pay as much dividends to its shareholders. If that happens, the funds may not be able to pay as much as it did.
One could argue that PNB has a big group of companies and others who are doing well, like Malayan Banking Bhd, could offfset lower dividend payouts from Sime. But on the flipside, if Sime didn't make these losses, it could pay higher dividends and PNB could declare even higher payouts.
The losses are huge and Sime owes it to its shareholders to reveal what exactly happened after it finishes its investigations. And by shareholders it means the average Malaysian who saves in ASB, EPF and other investment funds that have a stake in it.
But there are also other interesting questions. One is whether the episode will affect the ongoing government-linked company (GLC) transformation plan and if so, how?
The GLC Transformation Plan started in 2004 and its aim is to grow GLCs, which makes up the bulk of large listed companies on Bursa Malaysia and are major employers, and help drive the country's economic growth.
It is an impressive effort because all the major government investment funds are involved. There is a GLC Transformation Manual and KPIs or key performance indicators became the rage. There are 10 initiatives under the manual, which includes efforts like how to improve board effectiveness, laying down procurement guidelines and how to improve operations.
These are documented in multi-coloured books like the Red Book on procurement practices and the Purple Book on optimising capital management practices. Sime is one of the GLCs that is heavily involved in the GLC plan and in fact, it is in the G20, the 20 biggest GLCs in Malaysia.
It will be interesting to find out how Sime could be saddled with such losses if they had followed the transformation manual. If it did follow the recommendations, does it mean the manual needs to be tweaked? This will probably be discussed at the next meeting of the Putrajaya Committee on GLC High Performance, which is normally chaired by the Prime Minister.
The second important question is, is Sime too big to handle? To put it another way, should it be broken up into smaller units?
Critics of the mega merger of Sime would probably point out that its size would have something to do with its losses. It has more than 100,000 people in five divisions, working for it in 20 countries. That's more than double the number of people working for Maybank, the country's biggest company by market value.
Some would point to IOI Corp Bhd, which is involved in plantations and property, as proof that being focused has its rewards. There are also those who still question the mega merger, which was meant to create the world's biggest listed palm oil producer. They question it because investors who buy Sime are also buying into the risks of other businesses like energy and utilities, industrial equipment and motor vehicles.
The proponents of a breakup would argue that PNB for instance, is already putting its property business under one roof in I&P Group Sdn Bhd, so why not put Sime's property unit under that.
But there are also arguments against breaking up Sime. A conglomerate structure provides a safety net to its shareholders. This means that if one business doesn't do too well, other businesses would be able to offset that. One good local example is the Genting Group, which has the power generation and plantation businesses alongside its gaming and hospitality operations.
Another example is America's General Electric Co, which makes light bulbs, medical equipment, power plant turbines and even jet engines. Although there have been suggestions for a break up, GE has always been held as an example of a well managed business.
Sime's structure is fine and it can even be bigger, that is, if it grows on its own or buys rivals within the same businesses. Having a large company would ultimately benefit the country because Sime could help support other smaller Malaysian companies keen to be regional or global players. It could even be a case study for other GLCs who want to make it in the big leagues and it is also a flagbearer to help promote brand Malaysia, thanks to its regional reach.
One of the most common complaints of foreign investors is that Malaysia lacks large companies. Sime is already up there on the radar screens of major investors. It has good businesses and some of the best brains in the country are working for the group.
But first, Sime needs to get over this setback and it needs to do it quick.