Page 2 of
2 Barbarians at Asia's
gates By Chan Akya
visible in areas ranging from
commercial real estate in China to the
manufacturing capacity for LCD (liquid crystal
display) panels. Meanwhile, wealthy oligarchs
control the economies of many countries, even as
their families have disproportionately small
economic stakes in their empires. In turn, this
causes further gambling, usually at taxpayers'
expense.
Where in Asia The
biggest impact of private equity will likely be in
China and
India, where current capital
controls and ownership restrictions make hostile
takeovers quite onerous. In both countries, there
are too many companies that are controlled by
wealthy families or tycoons, which in turn have
pushed out more creditworthy borrowers.
Private-equity players, much as in Japan
and South Korea, will perhaps be called in to
rescue China's banking sector. At first blush,
this seems an odd thing to state, given that the
country's largest bank now ranks as the world's
third-largest by market capitalization. However,
this nugget ignores ground realities such as the
optimistic valuation of assets by banks in
providing loans, generally low credit standards,
non-existent documentation, and poor understanding
of corporate accounting. This is the main reason I
cited the example on January 13 to highlight
investors' focus on gaining from a weakening US
dollar. [3]
In the next few months, as
Chinese companies start implementing global
standards in accounting, a number of investors are
likely to express disappointment about the
performance of "their" companies, in turn pushing
down share prices. For banks, the situation is
fraught with danger, as in addition to failing
companies; they will also have to deal with
overextended consumers in large cities such as
Shanghai.
In the case of India, the
banking system does not need as much
ownership-driven redress, as the broader corporate
sector does. There are too many family-controlled
companies in India that suffer from incompetence;
this is particularly true in the manufacturing
sector, where the country lags China (albeit in
revenues more than in profits). Onerous laws and
trade unions make the operations of large
companies unusually tough, but private ownership
could certainly help many of these firms to
achieve greater balance between stakeholders.
In both China and India, private-equity
investors are likely to provide the impetus for
much-needed consolidation in industries ranging
from steel manufacturing to process outsourcing.
Such consolidation, while initially owned by
foreigners or run by private equity firms, will
eventually create larger and more successful
public companies. The biggest positive of all,
though, will be the elimination or reduction of
government intervention in many sectors, allowing
capital pricing to achieve an appropriate and
economic level in both countries.
Notes 1. Private-equity
firms typically enact debt-financed buyouts of
publicly listed companies, extracting value by
wide-ranging restructuring of operations and asset
sales. They are closely related, but still
distinct from, venture capitalists, who tend to
finance new businesses, and hedge funds, which
operate mainly in public markets. 2. The term
"barbarians at the gates" was coined in response
to one of the largest private-equity buyouts of
all time, the acquisition of RJR Nabisco by KKR in
the 1980s. See Enter the barbarian, Asia
Times Online, April 25, 2006. 3. See The thief and the
scorpion, Asia Times Online, January
13. (Copyright 2007 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
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