Strategic issues about smc c ganac pdf

PLM DBA 721-Strategic Issues Claro G. Ganac

PAMANTASAN NG LUNGSOD NG MAYNILA

Strategic Issues about San Miguel Corporation

Submitted to

DR. RONALD M. PASTRANA

In partial fulfillment

of the requirements of

DBA 725 -- Strategic Issues and Decisions

By

Claro G. Ganac


STRATEGIC ISSUES ABOUT SAN MIGUEL CORPORATION

“In April 2012, we completed our investment in a significant stake in Philippine Airlines … In

our view, this investment in our flag carrier strengthens our long-term competitiveness…

While some investors are not comfortable with the PAL investment, we are confident

that once our overall strategies are fully implemented, more will come to appreciate

this investment.”

SMC Chairman Eduardo Cojuangco Jr.,

2012 Annual Report

I. Introduction

In the phenomenally successful book “In Search of Excellence”, Peters and Waterman have

observed that excellent companies “stick to the knitting”, meaning that they stick to

businesses that they know best and where they have advantages and strengths.

This book presented the results of a research project conducted from 1979 to 1980

undertaken by the McKinsey consulting group. They investigated the qualities common to

the best-run companies in America. After selecting a sample of 43 companies from six major

industries, they examined the firms’ practices closely.

This paper seeks to examine the recent corporate strategies of San Miguel Corporation, one

of the country’s largest and most diversified publicly listed companies.

From principally a food and beverage and secondarily a packaging conglomerate, it has

diversified into oil refining and marketing, power generation, tollways and expressways and

other ventures that have no backward or forward linkage nor similarity with its traditional

core business. It also acquired controlling stake in Philippine Airlines and its low-cost carrier

subsidiary in 2012 from the Lucio Tan Group.

Observers have noted that San Miguel has been on a buying binge, and had targeted PAL --

Asia’s first airline – as a crown jewel of all its acquisitions. Half a year into the purchase

under SMC’s management, it inked an agreement for the purchase of 64 planes from

Airbus, which had put PAL into huge liability.

In September this year, SMC later on had to relinquish control and re-sell back to Lucio Tan

Group for US$1.3 billion. In newspaper reports in the wake of this development, SMC

President Ramon S. Ang admitted that San Miguel lost money on the deal.

This episode in San Miguel’s corporate evolution has sprung open serious questions about

the strategic directions that the Cojuangco and Ang management team has aggressively


taken under its helm in the last 10 to 12 years. In numerous media reports, Ang has been

quoted (some observers will probably note as boasting) that SMC will undertake ventures

such as constructing a new airport in Metro Manila and going into partnerships with foreign

partners, often seemingly without the benefit of a feasibility study (which may take a year or

two).

Is the Management of SMC engaging in wheeling-and-dealing to the possible threat and risk

of loan default? Is SMC expanding too aggressively and imprudently in industries and areas

where it has no competence or strategic advantage? Can SMC still absorb more loans and

debt so that it can fund speculative ventures?

These are the questions that have clouded the minds of even experienced professional

investors. These concerns have fueled anxieties and have translated to lower share

valuations compared to SMC’s peer conglomerates.

A. Objectives of the Paper:

This paper seeks to quickly examine the transformation of San Miguel into an investment

and holding company and to assess the diversification efforts into various non-core

industries where it has ostensibly no technological competence (being primarily a beverage

and food corporation) and operational advantages. It also seeks to:

a. Analyze the effect of the expansion and diversification program in terms of the

behavior of share price (as a proxy for shareholder wealth) and investor sentiment.

b. Examine the impact of the expansion on the balance sheet of SMC.

c. Make an over-all evaluation of the validity of the strategic moves of SMC from the

perspective of the Resource-Based theory of firm growth.

B. Scope and Limitations of the Study

This paper undertook examination of the corporate actions taken by the current

management of SMC in relation to its diversification program. Admittedly, it lacks

comprehensive rigor and more in-depth investigations due to time constraints.

The questions posed above in the background introduction certainly will required greater

effort and research into data that are not available in existing statistics and disclosures by

the company and interested parties.

In view of data availability limitations and time constraints, the student has instead limited

the analyses based on the above objectives. The analyses are based on cursory

manipulation and evaluation of available data.

The source of data is mainly secondary using online data sources such as the Financial

Times online resource, Thomson Reuters, newspaper and media accounts, San Miguel

Corporation’s website and corporate annual reports and other available information.


II. Strategic Shift:

Under the leadership of Cojuangco and Ang as Chairman and President, respectively, SMC

has undergone a major strategic shift, streamlining and broadening its business portfolio,

reshaping and redefining the very nature of its core businesses.

The sale of both Coca-Cola and Nestle was part of the new management’s effort to

restructure the San Miguel Group and focus its technological, managerial and financial

strengths to ventures where it believed it could add the most value. The proceeds of the sale

of these assets provided it with a cash warchest that it later on deployed into substantial

diversification program. It also implemented cost-reduction efforts, including an

organizational streamlining and rightsizing program.

While the company has stayed in its traditional business of food, beverage and packaging

and expanded through regional acquisitions and integration, it also made inroads into non-

related businesses and non-core geographic markets.

San Miguel's first major acquisition under Cojuangco and Ang was Australian boutique

brewer J. Boag and Son for A$96 million in 2000. It also expanded into ASEAN countries

when it paid $97 million for Thai Amarit Brewery Ltd. and $35.5 million for food processor

TTC (Vietnam) Co. in 2003. In 2004, it bought 51 percent of Berri Ltd., Australia's top

juicemaker, for $97.9 million.

To shore up its war chest, San Miguel spun off its brewery business into San Miguel

Brewery Inc. and took in Japanese brewer Kirin Brewery Co. Ltd., which bought a 15-

percent stake for $540 million in 2002.

In 2005, the company made its biggest overseas acquisition with the takeover of National

Foods Ltd., Australia's largest publicly traded dairy, which it bought for P80.38 billion. That

was followed later in the year with its $420-million purchase of Singapore-based Del Monte

Pacific Ltd., the region's largest pineapple canner.

In 2006, San Miguel has sold its 65% stake at its Coca-Cola Philippine venture (including its

subsidiaries Cosmos Bottling and Philippine Beverage Partners) to The Coca-Cola

Company (TCCC) for $590 million.

In Australia, San Miguel merged National Foods' operation with Berri. It subsequently let go

of its Australian business holdings which enabled it to generate one-off financial gains. In

November 2007, SMC sold Boag's to Lion Nathan for A$325 million. The same month, it

also sold National Foods to Kirin for ¥294 billion.

These financial maneuverings signaled the full transformation of SMC from an operating

company to a holding and investment company. This meant that it became active in

acquisitions, mergers and divestments of non-related but corporate and financial assets for

future financial gains.


While the global financial meltdown of 2008-2009 sent many companies into full retreat, San

Miguel Corporation powered ahead, investing mightily in a strategy to reaccelerate growth

and improve margins.

In rapid succession beginning late 2008, SMC bought up shares in power retailer Meralco,

paid up for the option to own oil refiner Petron, and acquired a majority stake in Liberty

Holdings, a Filipino telco co-owned by Qatar Telecom.

Forays into infrastructure have been successful, with San Miguel now participating in

several large-scale projects. It acquired a controlling stake in Citra Philippines, the owner-

operator of the Skyway 1 and 2, and a significant shareholder in the subsidiary that operates

the South Luzon Expressway. Thus, it has directly positioned itself against the Metro Pacific

group which is the concession owner of the North Luzon Expressway and is active in the

bidding for PPP infrastructure projects.

Chart 1. The SMC Group’s Business Interests


It bid for and acquired the concession for the construction of the P19 billion, 88.5 kilometre

two-lane Tarlac Pangasinan La Unión Expressway which began April 2010; at present, the

project is mid-way to completion, with the portion of the highway up to Rosales, Pangasinan

now open. TPLEX is the first of 3 road projects that Ang has on stream.

In October 2010, SMC finalized a deal to acquire 51% interest in Universal LRT Corp. Ltd.,

the company in charge of developing the Metro Rail Transit Line 7 (MRT7). It also acquired

the concession to build the Skyway Stage 3 which will connect NLEX and SLEX in 2012. Its

subsidiary Transaire Development also acquired the PPP project for the modernization of

the Caticlan Boracay Airport.

In a relatively short period, the company’s energy subsidiary San Miguel Energy has

become the largest power producer in Luzón. It now owns the 1000 MW Sual power plant,

the San Roque hydropower plant and the 600 MW Limay power plant.

Mining is another industry that Ang has been keen to enter. In early October 2010, SMC

bought 10% of Australia’s Indophil Resources, NL, a company which owns a 37.5% stake in

the Tampakan copper-gold project, the Philippines’ largest.

SMC has also expanded its oil and energy business with the purchase of Esso Malaysia

Berhad (65%), ExxonMobil Borneo Sdn Bhd (100%) and ExxonMobil Malaysia Sdn Bhd

(100%) for US$577.3 million.

In April 2012, SMC bought a 49% minority stake in Philippine Airlines (PAL) Holdings, worth

US$500 million, to revitalize PAL and Air Philippines. As reported earlier, SMC had to

relinquish and sell-back this stake to the Lucio Tan Group, but not after making a billion-

dollar deal with Airbus for a massive refleeting program.

In between these aggressive ventures, SMC bought a 33 percent stake in the Philippines’

largest power distributor, Meralco, in 2009. In 2013, SMC sold off this Meralco share block

and enabled it to book a P40 billion gain which provided a hedge against the effects of the

appreciation of the US dollar in the second half of 2013. These earnings completely offset

foreign exchange losses arising from dollar-denominated debt amounting to about P15.6

billion, brought about by the strengthening of the US dollar in the second half of 2013. (SMC

Press Release, March 27, 2014).

Moreover, SMC owns the medium-sized Bank of Commerce through its property subsidiary,

San Miguel Properties Inc.


III. Issues and Challenges About SMC’s Diversification Program

SMC’s Management has been explicit about its overarching goal and direction to maximize

the Company’s value and profitability. In the 2013 Annual Report, Chairman Cojuangco

rationalized and explained why it has aggressively pursued its diversification program:

“As one of the country’s largest conglomerates, with a history that stretches back 124 years,

we recognize that the value of our business lies in sustaining the Philippines’ growth. It is

precisely for this reason that we have anchored our diversification on projects that will help

improve the lives of our countrymen and bring about progress.”

This is an explanation why SMC had ventured into infrastructure development and

concessions, power, oils and fuels, airlines, mining and banking. These are areas where

SMC had heretofore not engaged in as businesses prior to 1998 when the new

management team came on board.

In the initial years following its diversification into non-core businesses, SMC showed better

financial performance. But by 2010, the diversification program became more speculative

with acquisitions into ventures where there are no significant cash income streams and

which required huge capital outlays (which by virtue of time constraints, the student could

not dig into and present for the purpose of this study). These ventures resulted in critical

issues and challenges that have put into question the validity of the diversification program.

Below are the key issues:

A. Reduced cash flows

SMC’s acquisition of Petron – one of the country’s largest companies in terms of sales

revenues – and the Sual power plant and another generating asset enabled it to

consolidate these latter company’s profits into the company’s profit statement. Thus,

from net earnings of P8.63 billion in 2007 at the time of the announcement of its

diversification program, this jumped more than six-fold to P57.8 billion (P19.20 per

share) in 2009.

However, SMC could not sustain this quantum leap improvements in profitability

because it continued its “buying spree” at the same pace, participating and winning bids

in infrastructure ventures and concessions which are more developmental and have long

gestations than the previous investments in fully operational companies. Thus, EPS

nosedived from P19.20 in 2009 to less than P6 in 2010, and further down to P5.00 in

2011 (See Chart 2).

Cash flow dropped to –P85 billion in 2010 from more than P100 billion in 2009 as it felt

the burden of new (non-revenue contributing) acquisitions and investments. Net cash

flows from traditional businesses and the new operating subsidiaries were wiped out in

2011 and 2012.


Unlike the Petron and power plant investments, the new projects are highly unlikely to

contribute to cash flows earlier than 4-5 years. The Skyway Stage 3 project and the

NAIA Expressway project were acquired at huge upfront fees to the Government.

Chart 2. SMC Earnings Per Share and Cash Flow (2009 – 2013)

(Source: © The Financial Times Ltd 2014;

http://markets.ft.com/research/Markets/Tearsheets/Summary?s=SMC:PHS)

B. High leverage positon and balance sheet effects

The acquisitions made by SMC in new companies and in concessions in infrastructure

and power generating assets have forced it to avail of a high level of debt when its cash

hoard arising from the divestment from Coca-Cola and Nestle Philippines has been used

up in the wake of its buying binge.

A number of stock market brokers and analysts, including the World Bank, have

sounded alarm bells as to a possible SMC debt default considering the high gearing

levels breached over what is rationally considered as prudent. It is now the country’s

largest private borrower with over P600 billion in interest-bearing long-term debt.

Debt-to-equity ratio is 2.56 as of the end of 2013, from 0.82 in 2009, as net debt nearly

quadrupled from P160 billion to over P600 billion over the four-year period. This

dramatically shows the huge burden of the diversification program.


In the 2013 Annual Report, Chairman Cojuangco admitted that concerns about the

Company’s leverage position on its risk profile which has extended into its share prices:

“We also faced head-on issues that resulted in a decline in our share price. In the

area of debt management, we have taken great care to proactively manage our

liabilities by availing of lower interest rates and longer payment terms. We have been

able to draw up a more flexible repayment schedule that closely matches the

targeted completion of major projects. In short, we will be using mostly income or

savings generated from our new projects to service our debts. Today, our net debt-

to-EBITDA ratio is at a healthy 3.14x.”

Chart 3. SMC Total Assets and Total Debt

C. Negative Investor Sentiment

The debt overhang has precipitated a sell down by institutional investors and

shareholders, resulting in low share prices that bottomed to P56 in 2014, a continuous

downslide from the high of about P180 in early 2011 (Chart 4. Five-Year SMC Stock

Prices).


While share prices has improved to P75 to 78 per share, over-all investor valuations

have remained low considering the improvement in net earnings and EBITDA in 2013,

thus showing lingering concerns about SMC’s management. Price-earnings ratio (PER)

is below P5.00 per share. (PER is the amount paid by investors per P1 of net earnings

made by a listed corporation.)

Chart 4. Five-Year SMC Stock Prices (2010 – 2014)

Comparatively, the two large and diversified conglomerates against which it is ranged –

Ayala Corporation and Metro Pacific – have much better valuations than SMC. Both

Ayala and MPI are engaged in related businesses such as infrastructure (water

distribution, tollways, oil refining) that SMC is currently in.

Ayala has a PER of P25.23 and Metro Pacific has a PER of almost P16.00, versus the

P4.88 of SMC. It is also currently trading at less than Book Value per Share of P0.78

compared to the P2.71 and P1.24 of Ayala and Metro Pacific, respectively. In other

words, SMC is considered an inferior stock in the perception of investors, very

likely due to the anxieties over its debt load and management consideration of enterprise

risks.

Chart 5. Comparative Investor Valuations: SMC vs. Peer Companies

Earnings Per

Share Price Earnings

Ratio Price to Book

Ayala Corporation 26.9473 25.2344 2.7053

Metro Pacific 0.3057 15.9961 1.2382

San Miguel Corporation 15.7950 4.8750 0.7760


D. Inter-locking Ownership between SMC and its Subsidiary Top Frontier

Investments

In 2012, SMC formed a subsidiary which it used to acquire the 25% stake held by the

Government that corresponded with the previously sequestered Coconut Industry

Investment Fund SMC shareholdings.

In other words, SMC’s Management used the Company’s own money to buy back its

own shares through this subsidiary, and Management retains control of both the parent

company and the successor company This represented a cross ownership between San

Miguel as Top Frontier Investments Holdings, Inc. the parent of SMC by virtue of this

transaction. The Company shelled out close to P58 billion to close the transaction. .

Some legal scholars term this as an “incestuous” legal relationship.

Exacerbating the issue of the buy-back and cross-ownership is that the move made

SMC’s stock illiquid. Its public float is just about 12 – 14 percent. As a result, SMC is

the only top Philippine corporation that is not included in the Philippine Stock

Exchange composite index.

To address this issue, Management converted SMC’s 49% stake in Top Frontier to

property dividends for SMC shareholders. The total 240,196,000 common shares were

given out at the beginning of 2014 to SMC shareholders who received one Top Frontier

common share for every ten SMC common shares.

It was rationalized (See 2013 SMC Annual Report) that the property dividends provided

SMC shareholders an opportunity to benefit from owning Top Frontier shares. Apart from

investment in SMC, Top Frontier is reported to also own gold, nickel and copper mining

assets that have considerable potential for development.

E. Unanticipated Major Risks and Uncertainties

SMC Management’s overly aggressive expansion and its miscalculation of the full

impact of dependence on external borrowings in its investment program has put into

serious question its prudence in the treatment of enterprise risks. It has relied on two key

capital raising activities that had not materialized:

a. The Initial Public Offering of San Miguel Global Power Inc. which was supposed to

have listed primary shares and to have raised substantial amount that would have

added to the cash reserves of SMC.

b. The failed listing of San Miguel Brewery Inc. After spinning off its brewing assets into

this subsidiary, it sold 49% of the shares to Kirin Brewery of Japan which enabled it

to generate investment gains that were booked into cash reserves. But even if it had

listed its shares in the PSE, the offering failed to take shape because of SMC’s


reluctance to offer a significant percentage as float to the general public.

Consequently, the PSE ordered the delisting of the stock.

Both of these ill-fated attempts tarnished the image of SMC and its management,

and seemed to shore up perceptions that it has gone into high-finance just to

continue with its ambitious expansion program. At one time the media reported that

President Ramon Ang planned to sell 1 billion SMC shares back in December 2012.

The deal worth about $3 billion would not have been possible because that number

is way in excess of SMC’s outstanding shares. These sudden and rash media

announcements, of course, do not contribute to the credibility of SMC’s Top

Management.

In addition, SMC’s Management again did not foresee the credit tightening of the

BSP and the downslide in the Philippine stock market in 2011 to 2012, which forced

its hand to resort to high interest-bearing debt to finance its speculative PPP bids

and acquisitions and start-up investments.

It undertook dollar-denominated bond offering of as much as $1.5 billion at the time

when the US eased up on its quantitative easing program as the US economy

started to pick up in 2012. This resulted in the appreciation of the US dollar, which

jacked up in turn the interest cost of the dollar-denominated borrowings.

Consequently, it had to book P16 billion in forex losses.

IV. Evaluation of SMC Diversification Using the Resource-Based View of Growth

A. Penrose’s Theory of Growth of the Firm

Edith Penrose (The Theory of the Growth of the Firm,1959) was one of the early scholars

who espoused the Resource-Based Theory in firm behavior and strategic management. She

argued that a business organization will seek to achieve the full potential from all its

resources. Penrose’s view was that firms possess excess resources, which can be used for

diversification purposes, and which then can fuel growth.

Firms grow as long as there are unused resources, diversifying when they can no longer grow

with existing products, services and markets. Growth continues until it is halted.

Changes can free the limit, and growth continues until the next limiting factor appears.

She has been credited by several authors as antedating and developing the seminal ideas on

the resource-based view theory of the firm (Alan M. Rugman and Alain Verbeke, “Edith

Penrose’s Contribution To The Resource-Based View Of Strategic Management”, Strategic

Management Journal, pp 769-780, 2002).


Her main intellectual contribution to strategic management theory is that the firm may be

viewed as a collection of fungible resources and, second, that an optimal pattern of firm

expansion may exist, which requires a balanced use of internal and external resources in a

particular sequence (Penrose 1959). She also believed that the optimal growth of the firm

involves a ‘balance between exploitation of existing resources and development of new

ones.’

The resource-based view sees that the competitive advantage of a firm lies primarily in the

application of a bundle of valuable tangible or intangible resources at the firm's disposal

(Penrose, 1959). To transform a short-run competitive advantage into a sustained competitive

advantage requires that these resources are heterogeneous in nature and not perfectly

mobile, meaning that the resources that the firm controls are not imitable nor substitutable

without great effort. If these conditions hold, the bundle of resources can sustain the firm's

above average returns.

The resource-based view approach to strategic management consists of the following four

characteristics:

1. The resource must be valuable if the resource-based approach is to achieve sustained,

above-normal returns, as compared to rivals. Even when a particular strategy appears

optimal for an organization, serious consideration must be given to where the money to

finance the strategy is going to come from, and what its costs are.

2. A set of resources, not equally available to all firms, and their combination into

competences and capabilities, are a precondition for sustained superior returns. Some of

the resources can be property rights, which are exogeneously granted by an outside

authority (such as government concessions), information asymmetry.

3. Competences and capabilities lead to sustained superior returns, to the extent that they

are firm specific (i.e., imperfectly mobile), valuable to customers, non-substitutable and

difficult to imitate. Capabilities are endogenous to the firm, and are built through time. This

can also include distribution channels, supply chains, knowledge and technologies and

brands with high consumer equity.

4. From a dynamic perspective, innovations, especially in terms of new resource

combinations, can substantially contribute to sustainable superior returns.

These four parameters will be used as a framework whether SMC had implemented its

value-creating strategy of diversification effectively.

B. SMC Acquisitions Validation Using the Resource-Based View Framework

SMC’s initial foray into expansion in the 1990s after it divested itself of its holdings in Nestle

and Coca-Cola had been in Purefoods, a processed meats manufacturer. Based on the

resource-based view analysis, the acquisition is value-creating in all four aspects of the


proposed framework. This acquisition has resulted in SMC’s undisputed position in the food

business with market-leading brand names in its portfolio.

Purefoods is allied to SMC’s meats and chicken business, and the expansion into an iconic

processed meats brand creates synergy not only in terms of marketing and sourcing, but also

across SMC’s supply chain and distribution management. In addition, SMC executives and

staff are very knowledgeable in the food manufacturing and has linkages with its commercial

feeds business.

SMC’s subsequent entry and investment into non-core businesses are, on the other hand, a

different matter and requires a more thorough analysis and assessment. Below is this

resource-based view strategic analysis in its new business.

Diversification Field Resource-Based Parameter Comment (Positive/Negative)

Oil refining and fuels Financial acquisition + Investment came from internal

funds; fully operational

Resources not available to all

competitors, unique

+ Oil refining technology is a highly

specialized resource; largest

marketing network

Competencies

+ Petron employees are career

oriented with knowhow/skills;

effective back-end and front-end

supply chain

Innovations + Continuous investments in facilities

upgrading

Power generating Financial acquisition

+ Investment came from internal

funds when SMC was still cash

positive; fully operational


competitors, unique

+ Sual power plant was acquired

from Mirant, a highly established

international power company; San

Roque plant also operational

Competencies

+ Mirant’s technology and staff

operational expertise are superior;

can be used in new Davao and

Bataan power plants

Innovations + Clean coal energy technology

reported to be used in new plants

Infrastructure and

Tollway Operation

and Management

Financial acquisition

- Large upfront financial outlays

made for PPP projects; funds

sourcing is mixed internal and debt;

Citra, however, is a going concern,

but contribution now not large

enough to cover the new investment

outlays



competitors, unique, non-

substitutable

+ SMC Management appears to

have connections with government

(unique), with information asymmetry

Competencies

- Tollway construction and operation

and management are not strengths

of SMC; the greenfield infrastructure

projects are to be implemented from

scratch; design capability not clear

Innovations

- Unclear effort at innovation

because of lack of firm-specific

competencies.

Mining Financial acquisition - SMC only has minority stakes in

Indophil; mining is highly speculative



substitutable

- Tampakan project is potentially

world’s largest gold mine; but now

non-operational now because of

legal and stakeholder issues; Nonoc

island nickel mining project remains

problematic

Competencies

- SMC has no experience in mining,

nor does it have access to

associates with expertise and

experience in this field.

Innovations

- Unclear inputs that SMC could give

to proponents; Tampakan uses

open-pit mining which has high

environmental impact

Airline Financial acquisition

- High acquisition cost; hindsight

showed negative gain from the

investment upon divestment



substitutable

Mixed - PAL management and

operating staff remains in the

company; but downsizing program

implemented was highly contentious

and there is high probability of

financial liabilities; SMC’s

connections with the government

had enabled it to open landing rights

to destinations in Europe

Competencies

- SMC people has no competence in

the airline business; operational

systems, management structures

and human resource systems are

entirely different; airline is highly

competitive

Innovations

+ SMC instituted fleet modernization

program and secured air rights to

some markets; but making the airline


profitable may take more doing in

this highly competitive industry.


V. Conclusions

Based on the foregoing analysis, the following may be concluded:

a. SMC’s reputation and image has been hurt by the ambitious and somewhat speculative

diversification into non-related businesses, and by the apparent lack of caution and due

diligence in the overpriced bids it made on the high-profile infrastructure projects.

b. This has extended to and is validated by the negative investor sentiment for the stock and

the below-average price valuations for its shares. This poor investor appetite will affect

any fund-raising activity it may embark on that is related to equity investments by the

investing public.

c. SMC’s financial condition has been significantly affected by its ambitious diversification;

there appears to be a lack of basic financial management concepts, with poor matching

of revenue streams and interest amortizations on large-scale loans. There was also non-

matching of the loan tenor and the long-term nature and gestation of infrastructure

projects.

d. SMC, based on the resource-based framework, has invested correctly in the oil and fuels

business and in the power generating business. Even on a cursory scale, the investments

appear to be paying off, with reported annual improvements in revenues and profits a year

or two after the investment. These two operating ventures are value-creating investments

and have added to the competitive advantage of SMC as a conglomerate.

e. There is however some negativity in its investment into infrastructure construction and

concessions because of the high acquisition cost for the project, even if Management has

parlayed its advantages in political connections and information asymmetry to winning the

PPP bids.

f. The investment in the airline business and mining appear to be ill-advised.

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