No Synergy in Construction Mergers

Two days ago, Prime Minister Abdullah Badawi called for more Malay construction firms to merge to boost their competitiveness internationally.

However, industry observers says that while merging may be a wise move, it should take into consideration business synergy.

Is there synergy in construction mergers?

Lets do some case studies. Way back in the 80s, we saw Jurutama, Mudajaya and Ipoh Garden Bhd teaming up their resources to form a wholesome entity called IJM. What happens? IJM ultimately became the lifeblood of Jurutama itself and the former entity Jurutama faded into oblivion. However, Mudajaya persist till today but lost much of it's status and is no more a gaint in it's own right as compared to yesteryears. IGB's core initiator went out and form Tan & Tan and became the new property development king-pin in Klang Valley. Today, they are more in Information Technology business. IJM evolved and came under Syed Mokhtar's control.

Was there synergy in the amalgamation of the three construction giants? Somewhat, the answer is yes and no. The amalgamation did not create an international class entity. They weren't bigger and better. It still remain as what they had been and what they used to be. Nothing of synergy and no synthesis too.

Recently, IJM is touting on the idea of acquiring Roadbuilders and Talam. While Roadbuilders is a somewhat sunset company which has lost steam in recent years, Talam is in deep financial crisis (they are technically insolvent) and requires colossus cash injection to stay afloat. The West Coast Highway privatisation project, if it materialised, could only be the possible sweetener to motivate any interested party to buy-out Talam and Europlus. That's why you can hear and see why Samy Vellu is pushing so hard to get the project approved by the PM's EPU. Samy is now the marketing agent for Chan Ah Chye of Europlus/Talam. But if that project materialise, would IJM-Roadbuilders-Talam threesome be synergistic? Is there any synthesis of the threesome? I can't see any.

According to Ang Seng Oo, the chief financial officer of Tronoh Consolidated Malaysia Bhd, which belongs to Syed Mokhtar, and of which also controls IJM, in order to compete at international level, you need a strong balance sheet and a good track record. "Merging with a suitable company to bring about synergy would enable us to make a bigger impact," Ang said.

But what is synergy? The definition of synergy is: a mutually advantageous conjunction or compatibility of distinct business participants or elements (as resources or efforts)

But what about synthesis? The merged entities must be a composition or combination of elements so as to form a unified-whole. The synthesized entities must be able to produce certain substance - a chemical reaction which integrates them as a whole and degrade them into a complex institution by combining them into a coherent whole.

Let's take a look at IJM and Roadbuilders. What mutual advantage is there? It can be observed that both are doing the same thing and are more a stand-alone business entity deriving it's strength purely on connectivity, not competency. If the merger ever persist, it could only result in retrenchments and re-adjustments of portfolios and there will not be any synthesis and what more, synergy.

What are the key elements for synergy and synthesis? As an example, IJM is strong in construction management but they may lack a strong and coherent structural and M & E engineering design team of the magnitude of Ranhill, and lacks financial clout. At such, a merger of IJM-Ranhill-Bank Muamalat would be synergistic and would synthesized them into a wholesome construction conglomerate. Another example - YTL is stong in construction and are involved in power plant business. They had a strong balance sheet. It makes sense for them to acquire Wessex of UK to become a global corporation to compete internationally and at the same time, be globally branded. YTL's name alone cannot be a global "branded". At such, Wessex provides them with the branding and international recognition, or what I would refer as "international accreditation". That's synergy and that's synthesis.

Among the bumiputera contractors, you can see that most of them, their strength is political connectivity and ability to secure govt contracts. Where is the synergy when that is the only strength? They lack fundamentals - engineering stranglehold, cogent and forceful resources such as competent and financially strong Building/infrastructure/sub-structure sub-contractors, suppliers, M & E sub-contractors and a dynamic backing from financiers.

Let's take an observation of Korean and Japanese construction companies. Hazama-Gumi owns a bank, Hazama Bank and whenever they get international projects, the EXIM bank is fully behind them for financial backing. Hazama never need to worry about banker's guarantee for Performance Bond of 5% contract sum. They don't have to provide 50% money-back collaterals to the bank. Same goes to Korean companies such as Hyundai, Samsung, Daewoo, etc. For Malaysian construction companies, most companies had to forked out between 20-50% cash as collaterals for procuring the banker's guarantee. Though public-listed entity (PLCs) may have standby facilities with the banks, however, it is also backed up by some properties or collaterals-in-kind. Without the EXIM bank support, it is onerous for Malaysian companies to compete with international giants. Apart from finance, we have yet to see Malaysian construction companies who empirically have the content and context of a strong and competent management team. Is it because of the current defects in the policies and regulations? Is it because PKK (Pusat Khidmat Kontraktor) requirements that all Class A Bumiputera contractors must be restricted to one race? If that's the case, it is impossible for a class A contractor to engaged only the best of the best. The policies dictate that they had to accept whatever is available to fulfil the regulatory requirements. They had to forego meritocracy and competency in compliance with the rule. The fact remains that world-class organization must be staffed with world class players, irrespective of race, color and creed. That's why they are world-class.

Well, Malaysia recently announced world class projects - RM9 billion Undersea power cables and Synergy Driven Plantation conglomeration. Would we see world class companies or just world class projects? Mahathir had a better answer. Ask him.