Mid-sized US firms offered as best targets

January 23 - Business Times Singapore - S'pore companies urged to look at top consumer market

Some middle-sized US companies will end up in Singaporean hands if local businesses take the advice of Hector Cuellar, president of RSM EquiCo Capital Markets.

'Singapore companies have captured some regional markets; it is time to expand into the largest consumer market in the world,' Mr Cuellar said in an interview with BT yesterday.

With much of the manufacturing done in Asia, companies now have to think about vertical integration - how to better distribute into the US. Other reasons for buying into a US company include broadening one's product suite and diversifying geographically.

'The capital formation in Asia - particularly India and China - has been impressive in the last few years. Asian companies now have the capital to 'attack' the largest market,' he said.

The middle market, businesses with revenue of up to US$1 billion, is where the opportunities lie. 'It's lower risk, lower valuation, less regulatory hurdles, easier to integrate, easier to get financing and promises higher returns,' Mr Cuellar said.

Historically, he said, small company buyouts - those costing less than US$250 million - have outperformed large buyouts by 5 to 7 percentage points.

Mr Cuellar sees companies involved in energy, financial services, technology, chemical, aerospace, food and healthcare services as prime candidates for acquisition by Singapore companies.

He, however, admits that the recent frenzied activities on the merger and acquisitions front have pushed up valuations for US companies. RSM EquiCo handled 52 transactions worth US$1.8 billion last year. That's up from just 36 transactions worth US$800 million in 2005.

On average, companies now sell for seven to eight times their projected earnings before tax, depreciation and amortisation (Ebitda).

This kind of valuation, however, may prove too high for Singapore companies, considering that many medium-sized Singapore listed companies are trading at similar or even lower multiples. For example, hard-disk drive component maker Jurong Technologies is trading at 7.6 times its Ebitda for 2005, while furniture maker HTL is currently valued at 6.2 times 2005 Ebitda.

Besides valuation, culture can also be a key factor in determining the ultimate success or failure of an acquisition. Mr Cuellar said that on that front, he didn't have any data on how successful Asian companies have been in making their acquisitions work in the US.

The advice from Mr Cuellar is to get the right adviser in negotiating and structuring the deal so that the existing management and staff are properly incentivised, making sure that their interests are aligned with those of the new owners.