A few weeks ago, Development Bank of Singapore (DBS), the largest bank in Southeast Asia, surprised the stock market with a whopping $7.2bn bid for Bank Danamon, the sixth biggest bank in Indonesia in terms of asset. Investors were flabbergasted. DBS was willing to offer 52% over the share price that day and nobody could fathom why. In the days that followed, the share price of DBS got absolutely smashed.
I wasn’t at all surprised by the bid, however. I’ve seen DBS pull off this trick before….
In 2001, I was working in a converted Georgian townhouse in the jewellery district of Farringdon. I was the Asia-hand at a brokerage house – charged with writing about the most exciting investment stories of the day. And I was presented with a proposal for a DBS deal. The details are spookily similar: same month, same company, same management change, same rationale and same bullish implication.
How did it work out? It went pretty well, actually.
The seismic event that transformed Asia
On 12 April 2001, DBS bid to acquire Dao Heng Bank at a 63% premium over the closing price of HK$37 per share. The deal was badly received and investors said DBS had overpaid, and it would dent its earnings. I covered the event back in 2001, and the share price languished for several years.
What persuaded DBS to go on shopping spree? Well, then, as now, DBS was flush with capital and operates in a market that is reaching a maturing phase of lower growth.
That first DBS deal took place just a few months before China become a member of the World Trade Organisation (WTO) in December 2001. That was a seismic event catapulting the country to the second richest in the world. And DBS got in just at the right time (though it later had to write down the value of its investment).
In fact, I would say DBS has one of the best management teams in Asia. They have access to the best intelligence in Southeast Asia, and they recognise that a major change is afoot – one that echoes the rise of China in 2001.
The big push into Indonesia
Following the 2008 economic debacle, DBS appointed Piyush Gupta, a former Citi banker, as its new CEO in November 2009. He and his management team spent a couple of years working on an expansion plan.
This latest deal with Bank Danamon is part of that plan. DBS recognises that Singapore, as one of the richest countries in the world, offers limited growth potential. But that we are likely to see an explosion in bilateral trade between Singapore and its neighbours under the Asean Free Trade Agreement.
This deal gives DBS a foothold in a hugely exciting market. Indonesia has clocked annual economic growth of 5-6% over the last few years. It is endowed with bountiful natural resources; salaries there are lower than most of the rest of Asia; it has a big domestic market of 240 million people; and its politics are stable.
By outsourcing its manufacturing base to Indonesia, Singapore can help relieve some of the pressures in its own society.
The fact is that Singapore could be facing a grim decade. The Singapore government realises that it cannot hope to compete with the Chinese as a manufacturing base. And the five million people squeezed onto this island can’t hope to maintain the current standard of living. Not without seething tensions, runaway inflation and a dangerously out of control property market.
DBS tells us about the new, new Asia
So it suits Singapore and Indonesia to foster economic trade. In fact, I think that over the next few years we will see an explosion of bilateral trade between Indonesia, Singapore and the other Asean nations.
The Bank Danamon deal has hit a political snag recently. The Indonesian central bank has said the Danamon acquisition can only be approved if two conditions are met: agreement on reciprocal treatment of banks in Singapore and Indonesia, and after a regulation on banking ownership is issued in June.
But the rationale is clear: China is going through a period with a lot of structural changes. And the Asean countries are moving to adjust – hoping to emerge from China’s shadow. Previously in MoneyWeek Asia, I showed how Myanmar is looking to do that. And the same story is being played out in Indonesia. And in Malaysia, Thailand and Vietnam, for that matter.
I foresee a wave of mergers and acquisitions across these regions over the next few months. And this will just be the start. Once financial links are well established, the logistics and infrastructure will follow. That means investment in roads, ports and industrial estates. What we are seeing mapped out is a new blueprint for Southeast Asia. It’s a hugely exciting story.
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