Corporate Restructuring and Governance Implications: A Case Study of the Guoco Group
| Date | 16 October 2009 |
| Published date | 16 October 2009 |
| Pages | 39-48 |
| DOI | https://doi.org/10.1108/15587890980001518 |
| Author | Yuanto Kusnadi |
| Subject Matter | Strategy |
Journal of Asia Business Studies FALL 2009
38
INTRODUCTION
Guoco Group Limited is a Hong Kong-listed group which is part of
the well-diversified Hong Leong Company Malaysia (HLCM). Guo-
co’s core business constitutes of financial ser vices (treasury and in-
vestment management – Hong Kong), banking and financial services
(Malaysia), and property development and investment holding (Sin-
gapore, Malaysia, UK and China). Its major subsidiaries and associ-
ates include the unlisted (100 per cent owned) Dao Heng Securities
Ltd and Dao Heng Insurance Co. Ltd (incorporated in Hong Kong
in 1981 and 1973 respectively); Hong Leong Credit Bhd (25.3 per
cent owned), which is listed on the Kuala Lumpur Stock Exchange
(KLSE) and the majority shareholders of other KLSE-listed Hong Le-
ong Bank Bhd and HLG Capital Bhd); and GuocoLand Ltd (62 per
cent owned), which is listed on the Singapore Stock Exchange (SGX)
and the majority shareholder of KLSE-listed Hong Leong Property
Berhad.
Guoco’s recent consolidation moves in its core financial services
and property development divisions have been bold and reaffirm the
intention of Tan Sri Datuk Quek Leng Chan (its Executive Chair-
man) to refocus Guoco’s (and HLCM’s other holding companies) op-
erations. In this paper, I focus on three activities: the divestment of
its core banking arm, the subsequent share-buyback schemes, and
related party transaction involving its property development arm. I
examine the motivations behind the deals and the implications on
the minority shareholders.
Guoco has been achieving excellent bottom line results, with the
success mainly coming from Hong Kong and specifically from the
Dao Heng Bank Group (DHBG). Within a short time, it had managed
to grow substantially in value and create a successful brand that was
well-known in the banking industry. However, in April 2001, Guoco
made an unexpected move: it decided to sell DHBG to Development
Bank of Singapore (DBS) Group Holdings Ltd.
The divestment increased Guoco’s cash holdings, but the huge
cash pile has since remained virtually untouched. This created some
disagreements between Guoco’s ultimate controlling shareholder
(Hong Leong Company Malaysia (HLCM)) and the second largest
shareholder (Kuwait Investment Office (KIO)). KIO was unhappy
with the strategies taken by Guoco’s management, whom they (KIO)
thought was not making the best use of the large cash holdings in
projects representing good investment opportunities. Subsequently,
Guoco was involved in a number of share buybacks. The first one,
completed in late 2001, met strong resistance from the minority
shareholders. The second one in April 2004 was intended to buy
out KIO’s stake.
A series of restructuring activities were also completed to refocus
the holding companies’ operations on their core businesses. Non-
core/non-strategic assets were divested and companies were re-
grouped to achieve synergy and help investors better identify the
businesses of HLCM’s different holding companies. One of its recent
consolidation moves involves the acquisition of Hong Leong Prop-
erties Bhd (HLPB) from Hong Leong Credit Bhd (HLC). The deal
allowed GuocoLand Ltd (GLL) to assume the role as anchor of the
property development business.
Overall, my analysis provide evidences to indicate that Guoco’s
conservative cash policy, the share buyback, and related party trans-
action involving GLL’s purchase of HLPB have the potential of exac-
erbating the agency conflicts between the controlling owner (Quek
family) and the minority shareholders. Guoco’s internal governance
mechanisms raise concerns of potential managerial entrenchment.
This was later manifested in subsequent activities as the Quek family
use the restructuring as means to tighten their control of the compa-
nies under Guoco.
Corporate Restructuring and Governance Implications:
A Case Study of the Guoco Group
Yuanto Kusnadi
City University of Hong Kong
aBsTRaCT
I
study a series of restructuring activities undertaken by Guoco Group Limited in recent years and the implications on minority share-
holders. The divestment of Dao Heng Bank Group to DBS Group reaped substantial benefits for Guoco, including an enormous
cash reserves to fund future investments. However, the cash hoard was not implemented to the best use by Guoco’s managers.
Subsequently, Guoco was involved in a number of share buybacks schemes. The share-buybacks met strong resistance from the
minority shareholders and eventually forced out the second largest shareholders. Guoco was also engaged in related party transaction
involving its subsidiaries in the property development business. Overall, I find evidences suggesting that corporate restructuring activi-
ties enhance the controlling owner’s grip on the group at the expense of the minority shareholders.
Keywords: Corporate restructuring, corporate governance
To continue reading
Request your trial