The shareholders of Kay Hian and UOB Securities have agreed to their proposed merger, which will happen under a scheme of arrangement. The deal was unanimously approved by shareholders of both companies at extraordinary general meetings held in Singapore on Wednesday. The merged entity will be called UOB-Kay Hian Holdings and it will be structured as an investment holding company.
The terms of the merger will firstly see UOB securities buy out all of its overseas interests in Hong Kong, Thailand, Malaysia and the Philippines for between S$53 million and S$56 million. Then shareholders of both UOB Securities and Kay Hian will exchange their existing shares for new shares in UOB Kay Hian Holdings. The new shares will then be listed on the Singapore Exchange.
The respective shareholdings of the two companies in the new entity has been arrived at using a rather complex formula which takes into account the net tangible assets of both firms and their previous five year profit histories. As a result Kay Hian shareholders will get 60.6% of the new company and UOB Securities sole shareholder (the UOB Group) will get 39.4%. 100% of the shares of UOB-Kay Hian Holdings will be listed.
Analysts say that the complexity of this deal stems from fears that some minority shareholders of Kay Hian might try to block the deal as happened with the failed merger of Vickers Ballas and GK Goh earlier this year.
One look at the 154 page offer document sent to Kay Hian shareholders shows that both securities houses have gone to extreme lengths not only to structure a deal that is as fairly weighted as possible, but also to pen a deal in which as much is explained as possible.
The overall rationale for the deal is that broking commissions are set to be liberalized in October. There will no longer be a minimum broking commission for the 36 brokers on the Singapore Exchange. Commissions are set to plummet and brokers are set to suffer. By merging, UOB Securities and Kay Hian are trying to achieve economies of scale to offset the loss of broking commissions.
The companies have estimated that if the merged group was in operation since January 1 1999, then full year profits for calendar1999 would have been S$93 million on revenues of S$300 million. In order to maintain a profit margin of that size - 31% - for the rest of 2000 and 2001, volumes on the Singapore Exchange will have to rise dramatically or the two firms will have to make some swingeing cost cuts. Either way, the rationale behind the merger is sound. It is now time to get down to the hard part of making it happen.
