Thursday, January 04, 2007

TSU/AmCham Spat: Round Two

When the consul told the mandarin that this was not the man charged with the offense he confessed that it was a case of proxy, but argued that by punishing this man the real culprit would be so afraid that the moral influence would be quite as salutary. -- George Mackay, From Far Formosa

The spat between the Taiwan Solidarity Union (TSU), one of the Greens, flared up again after the American Chamber of Commerce in Taiwan criticized the position of "minority parties" that are allegedly holding back Taiwan's economic development. Here is the meat of their defense:

Considering the rapid economic growth occurring in China and the substantial business opportunities that has created for Taiwanese investors, an increasing number of companies are bumping up against the investment ceiling. That is not deterring their continued expansion on the mainland, however, since the globalized economy offers a variety of channels for carrying on business activity. Instead, many companies have been spinning off divisions that concentrate on China operations and listing them on the Hong Kong stock exchange. Others are delisting in Taiwan altogether. The main result is to sap the strength of Taiwan’s financial markets – thus undermining the government’s own avowed objective of building the island into a regional center for fundraising and asset management.

The recent bid by the Carlyle Group to take over Advanced Semiconductor Engineering (ASE) has brought to light another dimension of the problem. The Carlyle offer price was 10% higher than ASE’s domestic share price at the time, and the price of the company’s shares listed in New York rose 15% on news of the bid. As Michael Kurtz, senior managing director at Bear Stearns Asia, noted in an analysis in the Wall Street Journal Asia, much of the “value proposition” behind the buyout offer is the opportunity for ASE to reorganize as a foreign entity and become exempt from Taiwan regulations restricting investment in China – not only the 40% rule but also other limitations on technology companies. The 10%-15% differential provides a measure, which could be applied to a host of other companies, of what Kurtz calls the “lost economic value” that derives from the “government’s China-averse posture.” Kurtz's article is reprinted in this issue on pages 47-48.

Perhaps as the American Chamber we should actually welcome this chance for multinational companies to buy up good local companies at bargain prices. But in fact, we regret to see conditions that day by day are draining Taiwan’s economic vigor. Several bills to relax the cross-Strait investment rules are currently before the Legislative Yuan. Once again we urge that the narrow political agenda of minor parties not be allowed to block an important step to ensure Taiwan’s continued economic relevance.

AmCham apparently once again attacked the TSU in these comments. Last year, in similar comments, they were far nastier. Speaking of last year's conference on the economy, Amcham wrote:

Unfortunately politics got in the way when the tiny Taiwan Solidarity Union (TSU) held the meeting agenda hostage to the party’s ideological bias against closer economic ties with China. As a pan-green ally, the TSU commands more influence with the government than the number of its supporters warrants, and the party’s “spiritual leader,” ex-President Lee Teng-hui, still has a following because of his past contributions to building Taiwan’s democracy.

This time around, they drop the hack on Lee Teng-hui, and do not mention the TSU by name. A vast improvement. I was critical of AmCham's claims about the TSU the last time around, for being so nasty, and for accusing the TSU of being ideological, as if China was not threat to Taiwan, or it was somehow unreasonable to limit investment. The public is split nearly 50-50 on the question, according to polls I've seen. Since polls routinely miss pro-Green voters, it is likely that this policy has majority support, though not all Greens support the investment limits.

AmCham has now proffered an actual argument in favor of Taiwan lifting the investment caps. This argument is referenced in the editorial, and printed as an analysis on p. 47-8 of the same issue. Regrettably, the article starts out with a highly slanted opening sentence:

Placing identity politics before economic well-being is never a cost-free electoral maneuver. If any of Taiwan’s political class still believed that it was, the illusion should have been starkly dispelled by the recent NT$179 billion (US$5.46 billion) private equity offer for Taiwan’s Advanced Semiconductor Engineering.

It is incredible that anyone observing 900 Chinese missiles and China's ongoing campaign to suppress Taiwan's independence could imagine that "identity politics" is the issue. The issue is survival. It is possible to disagree on what to do about China's threat to Taiwan, but only the ideologically deluded could pretend that it doesn't exist. It will be difficult to take AmCham and other US backers of a more open Taiwan seriously until they in turn take the concerns of their opponents seriously. It is perfectly rational to oppose investment in a country bound and determined to destroy you. Nowhere does AmCham acknowledge this problem.

Not only is national economic security at stake, there is also a case to made for the limits. I blogged last year on former President and agricultural economist Lee Teng-hui's discussion of the economic arguments in favor of the investment limits.

Nevertheless, the point that Kurtz makes is a potentially interesting one. Here's the claim, which originally appeared on the editorial page of the Wall Street Journal in December of last year:

In this light, the 10% premium offered by Carlyle for ASE’s stock, and the 15% post-announcement jump in ASE’s U.S. share price, offer a reasonable first-cut quantification of the price discount Taiwanese equities generally suffer due to government restrictions. Even applying the more conservative of these two figures across the broad spectrum of Taiwan’s listed stocks – which collectively have a market capitalization of nearly US$600 billion – implies a suppressed capital value of roughly US$60 billion.

It's fascinating to imagine how the behavior of a single stock could in any way represent a market capitalized at $600 billion. More fascinating is whether the Taiwan stock market actually "values" companies realistically, considering that company information is often limited, majority share ownership is closely held, and companies mainly invest from equity and not through stock sales. ASE, with large foreign institutional investment, is in many ways an exceptional firm.

Kurtz's piece was originally published on Dec 13, and by then it was clear that certain problems had emerged with the ASE sale. The China Post carries the ball (11/29/06):

The share price of the Advanced Semiconductor Engineering Inc. (ASE) yesterday fluctuated significantly amid reports that an increasing number of foreign investors have opined that price offered by Carlyle Group in its takeover bid for ASE, the world's largest chip packager, was too low, a trend which has cast uncertainty on the outcome of the acquisition deal.
After all the hullabaloo, the deal may yet fall through. The bump in ASE's share price was not a "valuation" made by the market but a speculative surge:

Yesterday, the price opened high at NT$38.50 per share, and rallied further to near NT$39 in mid-session, but selling pressure soon emerged to pull down the price to a low of NT$37.60 before rebounding slightly to finish at NT$37.70.

The share fluctuation yesterday came as a response to criticisms made by foreign institutional investors that the offer of NT$39 per share by Carlyle was too low. They maintained that for the acquisition project, the price/book value ratio should reach at least 2.5 to 3 times, or NT$45 to NT$55 per share, compared with NT$39 offered by Carlyle.

As foreign investors now hold a total of 67.42 percent stake in ASE for the moment, and demand a higher offer from Carlyle, whether the acquisition deal goes smoothly remains to be seen.

In order to force Carlyle to raise its offer and make a killing, foreign investors rushed to buy ADRs (American Depository Receipts) of ASE, jacking up its price by 1.16% on Nov. 27 and bucking the drop in the Dow Jones index.

In fact, in both Taiwan and the US, investors pushed the share price up hoping to make money when the sale goes through. However, subsequently, ASE's share price has been stagnant at about NT$36 in Taiwan, and around $5.70 in New York, since the sale ran into this snag. In fact, that same day that Kurtz published this in the Wall Street Journal, the local news was reporting:

ASE was cited in a Chinese-language Economic Daily News (EDN) report as indicating the recent share price fluctuation is normal, but the paper also cited sources as saying that the Carlyle Group has yet to submit its buyout proposal to Taiwan's Investment Commission. A recently released research report from Macquarie indicated that the fundamentals of ASE's share price turned out to be weaker than expected and warned that a substantial downside risk may arise if the deal fails.

So let it be written, so let it be done: the rise in the share price of ASE has absolutely nothing to do with the company's valuation or with any loss of value that Taiwan experiences because it is keeping its companies at home. Reality is that ASE may well turn out to be overvalued if the deal doesn't go through. Reality: Kurtz is wrong in every way. The China Post concludes:

If more foreign investors joined the speculative bandwagon or majority of the existing long-term ASE foreign shareholders refuse to accept the offered price, Carlyle may not be able to buy up 75% stake in the company, the minimum for ASE to delist from the domestic market and become a foreign firm, which will enable it to bypass the government's restrictions for investments in China.

On to the TSU. According to the Taipei Times, the TSU responded:

Although AmCham didn't specify which minority parties it referred to, TSU lawmakers called a press conference to criticize the organization.

"We are not saying that we are a minority party, but we have to make it clear that [AmCham's] argument was wrong," TSU Legislator Liao Pen-yen (廖本煙) said.

Liao said that past experiences had shown that increased investment in China was detrimental to the people of Taiwan.

"The national unemployment rate rose and the economic growth rate decreased in 2001, when the government's cross-strait policies were based on the principle of `active opening and effective management,'" Liao said.

"However, when the government reversed the principle to `active management and effective opening' in 2004, the economy started to show signs of recovery," he said.

Liao said that Taiwan's investment in China had reached 50.3 percent of the country's GDP, making Taiwan the country with the highest percentage of its GDP invested in China. He said South Korea invested 2.7 percent, Japan 0.6 percent and the US 0.3 percent.

Citing these data from the Chinese government, Liao asked why US businesspeople did not invest more in China if they were of the opinion that China was a profitable market.

Liao said that AmCham was dominated by taishang, Taiwanese businesspeople with investments overseas, and that this explained its "distorted" editorial.

It's a common occurrence in Taiwan society for A to criticize B when in fact he is sending a warning to C. Perhaps, AmCham is bouncing warnings off the TSU and hoping that the DPP will listen. Regrettably, AmCham has chosen to rely on empty arguments and ideological posturing.


Anonymous said...

I can see why the TSU would be upset. But what they haven't done - unlike SOME political parties here I could mention - is demand their critics be declared persona non grata in response.

Anonymous said...

The pieces of evidence you present actually contradict your main point:


The share fluctuation yesterday came as a response to criticisms made by foreign institutional investors that the offer of NT$39 per share by Carlyle was too low. They maintained that for the acquisition project, the price/book value ratio should reach at least 2.5 to 3 times, or NT$45 to NT$55 per share, compared with NT$39 offered by Carlyle.


This actually reinforces AmCham's point that a foreign bid would increase the firm's value...


A recently released research report from Macquarie indicated that the fundamentals of ASE's share price turned out to be weaker than expected and warned that a substantial downside risk may arise if the deal fails.


This actually means that if the firm remains based in Taiwan, the 10-15% margin will disappear, which reinforces AmCham's argument.

Consequently, AmCham's argument hasn't been refuted.

Michael Turton said...

I'm afraid you are being quite selective in your look. Kurtz's position is that the 10-15% jump is a market valuation. The reality is that it is a speculative fluctuation that has since fallen back. The other stuff there is to show how Kurtz's argument completely fails to take into account the reality of how the firm is valued and analyzed by actual investors -- the offer is low -- if the jump represented an actual valuation, why is it so low? Ans: because it is speculation unrelated to the value of the firm. And also, how ASE is a very singular firm with respect to other tightly held firms on the Taiwan market.

Bottom line: Kurtz's evidence can't support his argument. Perhaps other evidence can, but he isn't aware of it.



Anonymous said...

The reason the market valuation is only 39 and 45-55 reflects the fact that the market thinks the probability of a deal is less than 100%.

In an asset market, if there is a probability of 50% that an asset currently at price B will jump to price A at time t in the future given avg rate of return r then the market value is (A+B)/(2(1+r)^t).

Michael Turton said...

The market didn't "think" anything, tc. The price spurted up for purely speculative reasons, the deal got shaky, and it has since stagnated. If your analysis was correct than the price should shift to reflect the increasingly lower expectations that the deal would go through, but that has not happened either. It peaked and fell -- that signals a speculative bubble.

The analysis of expected future returns you've presented is a post hoc rationalization for the market's behavior, since the "chance" is assigned post hoc -- whatever the market did, that's the probability they assign to the deal. You can see the problem with that analysis as you've presented it -- never mind its erroneous assumptions derived from rational choice models of economic decision processes....

And you're still obscuring the issue: -- did the evidence Kurtz assemble support his argument? The answer to that question is emphatically "no."

AmCham can get its point across as the issue has good arguments on both sides. But unfortunately its reflexively impoverished right-wing view of the world, and its inability to empathize with the fears of locals has hampered its ability to communicate.