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Sunday 23 May 2010

Solving the Sime Darby equation

A QUESTION OF BUSINESS BY P.GUNASEGARAM

THERE are two parts to solving the problems at Sime Darby Bhd and they have to start simultaneously, although it will take longer for one.

The first is to understand completely the reasons why one division - energy and utilities or E&U - had massive cost overruns, needlessly undermining the good showing of the others.

From that the Sime Darby board must do two things - decide who was responsible and take appropriate action against them. Next, it must lay down the policies, rules, checks and balances to ensure that such a thing does not happen again. These have to be done publicly to restore faith and confidence.

 
It will require close, coordinated work and effort by chairman of the board, Tun Musa Hitam (second from left), his board, particularly the head of the working group investigating the cost overruns, Datuk Seri Panglima Andrew Sheng (left) and acting CEO Datuk Azhar Abdul Hamid (second from right).
 
The second - the more important and more difficult - is a task for Sime Darby management, guided by the board which will set policy, oversee management performance and insist on corporate governance standards.

That is the complex and difficult task of how to create value within the Sime Darby group across all the five operating divisions (six if we include other businesses such as China and Health) without undue risk.

It will require close, coordinated work and effort by chairman of the board Tun Musa Hitam, his board, particularly the head of the working group investigating the cost overruns, Datuk Seri Panglima Andrew Sheng, and the newly appointed acting CEO, Datuk Azhar Abdul Hamid.

Calls for Musa and the board to resign must be studiously ignored until the full investigations of the working group are revealed and responsibility for the various misdeeds ascertained - the board has a responsibility to complete what it started.

Most board members have had distinguished careers and reputations - a former deputy prime minister, a former chief secretary to the government and chairman of the Employees Provident Fund, a former head of Hong Kong's Securities and Futures Commission and former Bank Negara adviser, a former head of an international accounting firm, a former director-general of the Education Department, the chairman of Permodalan Nasional Bhd and so on.

The board should be given a chance to put matters right. One can be forgiven for thinking that they would have had good grounds to do what they did, that is to ask the previous CEO to go on a leave of absence prior to the expiry of his contract.

While thoroughness of investigations is important, speed too is of the essence especially since it has been seven months since the working group was set up to investigate the problems.
Sime Darby has found out that mere merger will not create value - what is much more important is what you do after the merger. Synergies can be destroyed by risky moves into areas where the group has no core expertise.

By the same token, any move to break up Sime Darby just three years after the merger will be too premature and will mean that best value for the various parts will not be obtained in any sale.

Among the first things that Sime Darby has to evaluate is its risk management. Have the risks in a project been measured as much as that is possible and could the risks have been mitigated?

Large returns almost always come with large risks. The larger the size of the project, the greater is the risk to the entire group. If risky projects must be undertaken, then it must be done in a way which insulates the group from the effects. That's not easy to do in practice.

Whatever prompted Sime Darby to get into the Bakun project? It has no core expertise in building dams, it does not have civil construction expertise apart from fabrications and Bakun was a project fraught with problems right from the start. Bakun was fundamentally a wrong decision.

Sime Darby needs to reappraise some of its investments in China - a port and a water supply project - in both of which it has no core expertise. That's a sure way for projects to go down the tube.

Feasibility studies are just that and can be engineered to show anything good or bad. The difference is the amount of expertise and competence you can bring to bear on a project. If you have no such expertise on board, stay away until you do.

Nobody - unless for reasons of patronage and corruption - gives away projects with great returns for little or nothing, even if the parties are considered to be friendly. A healthy scepticism should surround projects which look too good.

Sime Darby needs to scrutinise each of its divisions to see how value can be added and to ensure that value which is already there is not diluted but protected and enhanced.

Even within the now notorious E&U division, there are gems such as the power producers and fabrication yards which are doing well and have the potential to do better. A strategy of careful related diversification, never at any time biting off more than be chewed, can yield good returns.

The plantation division holds valuable land in prime areas near urban centres in Peninsular Malaysia. The way that these are transferred to the property division and then developed must be closely watched. Selling land cheaply, although these give great returns because of the low original cost, is a no, no. Better to keep the land and develop it in-house to earn more money.

Instead in some instances, properties have been sold into joint ventures at less than market prices to be developed by expertise from the other parties. It is not even clear what further expertise they bring to Sime Darby which has in the past developed whole townships.

With tens of thousands of hectares of land with development potential, probably the largest among any company in Malaysia, the board and management must ensure that they are carefully developed with maximum benefit to the group.

That's by way of flavour of what can be done. But for that and much more to take place, there is one over-riding requirement - the right people in the right places being allowed to do the right things. This is not about agendas, it's about running a business well.

The Government should resist all attempts to politicise this issue and turn it into something that it is not. The simple fact of the matter is that cost overruns have ballooned to nearly RM2bil and resulted in nearly as much provisions over the years with a near RM1bil provision for the current year ending June 30. That has to be explained and the responsibility for that established.

The Government should steadfastly give its full support to the board and management to clean the company up, run it professionally and competently, and yes, create value throughout all its operations without any interference from vested interests.

The benefits from such moves will be tremendous - it will help restore Sime Darby as the company with the largest value on Bursa Malaysia and more importantly provide a steady and growing return to its major shareholder, Permodalan Nasional Bhd which operates units trusts in which many millions of Malaysians have invested.

Sime Darby's success is important for Malaysia and Malaysians. Let's not hinder, wittingly or unwittingly, the measures that need to be taken to put this conglomerate back on the path of growth, profitability and prosperity.

>Managing editor P Gunasegaram believes that neither a merger nor a de-merger adds value. They merely highlight or downplay value already there.

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Can Sime Darby create value?
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