Foreign companies will find it much easier to get involved in M&A in Taiwan, thanks to sweeping legal changes.
The new legislation is aimed at shaking up the country’s lacklustre financial services industry. Changes to M&A laws and the introduction of the Financial Holding Company (FHC) Act are paving the way for long-awaited consolidation.
The Company Merger Law introduced in January makes it much easier for domestic and foreign companies to engage in M&A. Michael Wong, a partner at international law firm Baker&McKenzie in Taipei, says the new law is a radical change.
“Companies that wish to purchase other companies will no longer be required to negotiate with each shareholder individually,” he says. “The process will be simplified by a mandatory share exchange in which only two-thirds of shareholder votes will be needed to ensure a sale.” Significantly, the law provides a legal basis for cross-border mergers involving offshore companies and allows foreigners to use their own shares as payment for the first time. Legally they are now on a level playing field, says Wong.
Consolidation of Taiwan’s financial services industry has long been considered necessary following excessive fragmentation when the government introduced deregulation in 1992. Up to that point banking was dominated by a handful of state-owned banks and needed competition.
But deregulation did not have the desired effect, says Sherry Lin, a director at CSFB: “The government set a minimum capital requirement of NT$10 billion [$285 million] for a new banking licence, believing the requirement was high enough to limit applicants. This proved a miscalculation and 16 new banking licences were granted in two years.”
So banking capacity doubled, and banks have suffered from intense competition and low profit margins. Banking licences have also tended to be restrictive, preventing banks from offering non-traditional services. As a result, banks, insurance companies and securities firms have been kept separate, in contrast to the global trend.
The FHC Act, introduced in November, which facilitates M&A across financial sub-sectors, comes a year after another law was introduced to ease M&A between institutions in the same sub-sector. A FHC can own subsidiaries in banking, insurance and securities. Under the act, a FHC can be formed from the conversion of any of these, as long as it has a capital of NT$20 billion, and meets several other criteria.
So far, at least 14 groups have announced their intention to establish FHCs, and six have been granted licences. CSFB’s Lin reckons this first wave of consolidation “will really help to separate the stronger financial institutions from the rest, as the holding company structure will allow the better ones, which have gone through their peak NPLs cycle, to focus on top-line growth either organically or through consolidation”. Economists estimate that NPLs amount to 15% to 20% of bank loans in Taiwan, higher than Korea’s at the peak of its troubles, and much higher than the government’s official estimates.
The rapid establishment of the FHCs has some investment bankers worried. Analysts at UBS Warburg suspect that the move, which offers growth opportunities for Taiwanese institutions by allowing them to introduce more diverse products and enlarge their equity bases, will also present new and serious managerial challenges. With no local experience of managing such institutions, foreign expertise and partnerships could offer substantial benefits. Of the 14 groups to have applied, only Fubon Holdings has a foreign partner, Citigroup, which holds a 15% share in all the future FHC’s member companies. China Trust, a future FHC which has a strong banking arm but is weak in other areas, is said to be keen on attracting a European insurance partner.
These long-awaited regulatory changes come at a time of great change for Taiwan. The island is expected to emerge from its worst recession in 26 years by the second half of 2002, as the US recovery fuels export demand. The recovery of the Taipei stock exchange that began in October 2001 has continued this year, helped by confidence in the new cabinet and the improvement in the technology sector that accounts for around 40% of the market’s capitalization.
Taiwan’s economy still faces many challenges ahead. Structural changes to its economy including the hollowing out of its industrial base to lower-cost mainland China and a rising natural rate of unemployment promise testing times.
