INTRODUCTION
 
This paper presents a case analysis of the takeover
of Multi-Purpose Holdings Berhad (MPHB) by Kamunting
Corporation Berhad (KCB) in 1989. The target, MPHB,
is a company associated with one of the dominant
ruling political parties, the Malaysian Chinese
Association (MCA). In this episode MPHB was offered
RM1.13 billion for its entire paid-up capital by
Hume Industries Berhad. KCB entered the scene as a
white knight through an offer to buy over Koperatif
Sebaguna Malaysia (KSM), a major shareholder of
MPHB.
 
It was the first ever hostile takeover in the
Malaysian corporate scene involving a consideration
in excess of one billion ringgit. It was also a very
significant event to the local stock market, the
Kuala Lumpur Stock Exchange (KLSE), as it tested if
the market was able to handle the event in an
efficient manner. This study therefore makes an
important and useful exposition both in terms of
business strategy of the parties involved and market
efficiency.
 
This paper recounts the takeover episode, and
closely examines stock market responses to the
events leading to the takeover of MPHB by KCB
through the acquisition of KSM. The findings of this
study should compliment earlier studies on corporate
takeovers which mostly deal with aggregate data.1
 
DATA AND METHODOLOGY
 
Almost all the information relating to the events
was summarized from news reports between April and
August of 1989.  The daily returns of MPHB, Hume and
KCB were obtained from University of Malaya stock
data. The Kuala Lumpur Composite Index was used as a
proxy for the market return.
 
In deriving abnormal returns, the market model with
Scholes-Williams adjustment for thin trading is
used. The market model parameters are computed over
a 200-day period well before the announcement, that
is, from day -250 to day -51. The abnormal returns
are calculated over a window of varying lengths,
beginning from day -50, for each of the companies
involved.
 
THE TARGET
 
Multi-Purpose Holdings Berhad (MPHB) was launched in
August 1975 with great fanfare. It was set up as an
investment company by the MCA to promote the ethnic
Chinese Malaysian stake in the economy. Great hopes
were pinned on it hailing it as an investment
vehicle to give shareholders a home for your family
and a stake for your country .2
 
The company started its business activities with
housing development and plantations. Its early years
saw growth into areas such as manufacturing,
trading, banking, shipping and recreation. Indeed, a
concoction of politics and business quickly shot the
company into one of the largest conglomerates,
listed on both the Kuala Lumpur and Singapore Stock
exchanges.  By 1984, the issued and paid-up capital
which was originally RM30 million had been raised by
25 folds to RM751 million.
 
However, heavy losses suffered during the recession
years of 1985-87 wiped off a substantial portion of
the shareholders fund. The share price plummeted to
below par and was as low as RM0.355 per share in
1986. Its long-term gearing ratio rose from about 20
per cent in the early 80s to about 30 per cent in
the mid 80s, reflecting its increased debt burden.
In 1988, its long-term debt was about 37 per cent of
total capitalization.
 
Owing to its significant depreciation in value, MPHB
was seen as a very attractive target for takeover.
MPHB also appealed to many prospective purchasers
because of its battery of prized assets in its
stable: a lucrative gaming concern in Magnum
Corporation Berhad, prime plantation lands under
Dunlop Estate Berhad, prime development lands under
Bandar Raya Development Berhad, a commercial bank
(Malaysia French Bank) and a finance company (Magnum
Finance).
 
THE PREDATOR Hume Industries (Malaysia) Berhad,
which all this while had kept a low profile in the
corporate scene, suddenly shot into the limelight on
12 April 1989 with its proposed offer for MPHB. The
RM1.13 billion bid, the biggest ever in Malaysia at
that time had set the market talking, especially
since it had the setting of a hostile takeover.
 
Hume was incorporated in Malaysia in 1961 as a
wholly owned subsidiary of Hume Industries (Far
East) Ltd, to manufacture asbestos cement products.
Its first factory in Petaling Jaya commenced
production in 1962. At this time, although its core
business remained in asbestos concrete products, the
company was well diversified into activities such as
property developments, engineering rubber products,
granite quarrying, electrical products and media and
advertising.
 
For the takeover, Hume offered RM500 cash and
RM1,000 nominal value of redeemable convertible loan
stock (CULS) for every 1000 shares in MPHB. The CULS
had a tenure of four years and carried a coupon rate
of three per cent payable yearly on 30 September,
and were redeemable at the end of the fourth year.
This general offer pegged MPHB s shares at RM1.50
per share, which was about 5 per cent premium over
its prevailing market price of RM1.43. The offer was
conditional on receiving more than fifty per cent of
voting rights attributable to the ordinary shares of
MPHB.
 
To finance the bid, Hume is making a three-for-two
rights issue of 201.06 million shares of RM1.00 each
at RM1.50 a share.  This would also be the largest
cash calls in the Malaysian history at that time.
 
Together with the announcement, Hume also announced
that it had been awarded a contract valued at not
less than RM500 million by Projek Lebuhraya Utara
Selatan for the supply of construction materials to
the North-South Expressway project.  The contract
would provide a boost to Hume s profits, which was
estimated at about forty sen per Hume share,
assuming a fifteen per cent profit.3
 
Hume maintained that the general offer for MPHB s
shares was in the long-term interest of the latter s
shareholders as the company needed a
well-diversified group to broaden its earnings base
and to reap benefits from economies of scale. Some
analysts, however, contended that the move was
orchestrated by the 51.3 per cent majority owner of
Hume, the Hong Leong Group of Companies who wanted
to establish themselves as a major corporate player
in the Malaysian corporate scene.4
 
MARKET REACTION
 
There was an exceptionally high trading volume of
MPHB shares in both the Kuala Lumpur and Singapore
stock exchanges in the last five weeks before Hume s
takeover announcement. At one point more than 60
million shares changed hands on a single market day.
Over the heavy trading period, the MPHB share price
which was previously languishing around RM1.00 moved
up steadily and hurriedly to around RM1.53 by 25
April 1989.
 
The MCA made it clear that they were unhappy with
Hume s offer, saying that they felt being let down
because they had not been consulted.5 MCA leaders
revealed that the offer pre-empted a separate MPHB
rescue plan worked out in conjunction with Bank
Negara Malaysia. There were also speculations that
the takeover would lead to a linkage of the Hong
Leong Group s interests to those of the powerful
United Malay National Organization (UMNO) ruling
party. MCA had also called for an investigation of
possible insider trading in MPHB shares immediately
before the takeover announcement.
 
MCA used to wield control of MPHB through a 49.8 per
cent direct and indirect stake in MPHB held by KSM.
KSM was a deposit-taking cooperative owned by some
166,000 MCA members.  The cooperative came under
investigation during the Bank Negara crackdown on
the deteriorating affairs of deposit-taking
cooperatives in 1986. KSM was found to be insolvent
to the extent of RM330 million, and it was placed
under the receivership of Price Waterhouse. However,
under Bank Negara s rescue scheme, depositors were
promised ringgit-for-ringgit refund; 50 sen in cash
and 50 sen in convertible unsecured loan stocks
(CULS).  It was estimated that the receivers needed
at least RM560 million to meet its obligations.
 
WHITE KNIGHT
 
The MCA tried to stymie the Hume offer by soliciting
a counter offer from a white knight. Around the
first week of May 1989, the market was rife with
speculation that toll operator Kamunting Corporation
Berhad (KCB) would buy the 28.9 per cent stake in
MPHB from the receivers of KSM, Price Waterhouse.
 
KCB was a company one-fifteenth the size of MPHB. It
was originally a 1913 British company known as
Kamunting Tin Dredging Ltd, and was incorporated in
Malaysia in 1976. Its mining operation ceased in
1982 due to poor grade ground and low tin prices. It
therefore had to look for alternative business
activities.  In 1985 it was awarded the lucrative
road privatization contract, and later the rights to
collect tolls at the Kepong interchange. The
opportunity to take over MPHB was very timely, as
KCB was in search of other viable business to
diversify its activities.
 
However, many analysts were skeptical about the
ability of the thinly staffed KCB to manage MPHB s
array of businesses. It prompted market observers to
predict that the company intended ultimately to
dismantle MPHB, keeping only its prized assets such
as its stakes in the Malaysian French Bank and
Magnum Berhad.
 
The official announcement came on 12 May 1989, when
KCB issued a statement that it had offered RM592
million for all of the assets of KSM which include
28.9 per cent ownership of MPHB.  It was then clear
as to who was the much anticipated white knight.
Besides the MPHB s shares, KSM assets were mainly
fixed assets and properties. KSM also held another
21 per cent indirect stake of MPHB through KSM-MP
Investment Fund, but receivers were not empowered to
dispose of this latter block.
 
Securities analysts valued KCB s offer at RM2.05 per
share, substantially higher than Hume s RM1.50
offer. However, Hume s bid was for the takeover of
the entire asset of MPHB under existing rules and
procedures while KCB s move was disguised as an
attempt to overcome the financial woes of KSM. If
the purchase was successful, KCB would hold the
largest block of MPHB shares, but still short of the
33 per cent threshold ownership which would require
a general offer under Malaysia s takeover code.
Viewed in this way, it was not strictly a counter
takeover offer, and KCB can hardly be classified as
a true white knight.
 
White knight or not, KCB s offer posed a dilemma for
Hume, who had earlier secured a one-month extension
to prepare the formal offer documents for MPHB s
shareholders. That might now be a pointless
exercise. Alternatively, Hume could improve on its
offer and persuade the receivers that MPHB would be
better off in the hands of Hume.
 
As receivers, Price Waterhouse were obliged to
obtain the highest price it could get from any sale
of KSM s assets in order to repay the cooperative s
depositors, mostly MCA s rank-and-file members. The
price offered by KCB would allow the receivers to
cover all obligations of the cooperative and repay
its depositors on a dollar-for-dollar basis. Viewed
in this respect, KCB s offer was more attractive
than Hume s.  Besides, the unsecured loan stock
proposed by Hume was subjected to risk.
 
On 13 May 1989, Price Waterhouse issued a brief
statement that they would make a positive
recommendation to Bank Negara Malaysia to accept KCB
s offer.
 
On 16 May 1989, KCB s board formally submitted to
the KLSE their RM592 package for the proposed
acquisition of KSM. The package consisted of an
issue of 296 million new shares and two series of
guaranteed loan stocks. KCB s board had also made
arrangements for all major shareholders of KCB to
buy back all the new shares from the receivers of
KSM, so as to ensure that the major shareholders did
not lose control of the company and the receivers of
KSM would have sufficient cash to reimburse the
depositors.
 
On 15 June, KCB announced that the sales and
purchase agreement for the acquisition of 100 per
cent of KSM s asset for RM592 million had been
executed. The announcement of the signing of the
agreement was only two days away from Hume s
deadline to submit the offer letters to MPHB
shareholders. Market observers were rife with
speculation as to Hume s next move. However, on 3
July 1989, or eighty days after its initial
announcement, Hume officially withdrew its offer.
 
Observers felt that Hume s biggest mistake was that
it started from scratch, owning only 29,000 of the
751 million MPHB shares. This may have been taken as
a sign of lack of commitment on Hume s part. As
such, its offer of RM0.50 cash and RM1.00 worth of
loan stock per share did not draw much enthusiasm.
Another strategic error was that Hume did not
address the KSM s financial problems. This might
also have contributed to the unfavourable reaction
from MPHB.
 
EMPIRICAL ANALYSIS
 
The Target: MPHB
 
Table 1 shows the analysis of daily returns and 
cumulative abnormal returns (CAR) of the target, MPHB, 
for the period beginning from day 50 before Hume's 
takeover announcement to day 110 after the 
announcement. The abnormal returns are calculated 
using the market model with appropriate adjustments 
for thin trading. The CAR is also presented in 
Figure 1.
 
The CAR reveals that the market did not show much
reaction until about 20 days before the
announcement. From that point prices began to climb
steadily and steeply, occasionally interrupted by
short falls, until the CAR reaches a maximum of 38.6
per cent on day 5, after the announcement. This
price surge, accompanied by heavy trading volume
occurring before the official announcement, strongly
suggests leakage of information.  Hence, it is not
surprising that MPHB management called for an
investigation of insider trading activities.
 
It was also during this time the MCA was working
with KSM s receivers to resolve KSM s problems.
After the announcement, the management of MPHB were
putting numerous signals to the market as to their
objections to Hume s bid, and their efforts towards
a rescue package. Possibly, all this conflicting
news was causing the fluctuation in the abnormal
returns recorded by the company.
 
A downward revision in prices is observed from day
+8 onwards, implying an earlier over reaction.  The
very small premium of Hume s offer of RM0.07 per
share (RM1.50 per share over the prevailing market
price of RM1.43), may also have contributed to the
decline. Fifty days after the announcement, most of
the earlier gains had been wiped out, and the CAR
dropped to about 9 per cent.
 
The behaviour of CAR for MPHB indicates several
market implications. Firstly, the information might
have gone into the market even before the official
announcement. Secondly, there was obvious excitement
of the market on the news. Thirdly, the price
increase, for this case, was a temporary phenomenon.
 
The Bidder - HUME
 
Table 2 presents the daily returns analysis of 
Hume's share around the announcement date. The CAR is 
also presented in Figure 2. It is observed that
there was a significant abnormal gain realized by
the acquirer, beginning from about 15 days before
announcement. The CAR jumps to about 40 per cent by
day -6.  Although such gains may be in line with the
value maximization motivation for acquisition, the
large and sudden positive gains prior to the
announcement could also well be due to information
leaks.
 
The CAR after the announcement is quite flat
although some price movements were observed in the
first 15 days, most probably reflecting market
reaction to MPHB s resistance. In fact, on day +15
the market was full of speculation on the potential
white knight and had more or less concluded that
Hume s offer would not succeed. After this point,
Hume s share is seen to be no longer sensitive to
subsequent development of the case. The lack of
price reaction goes on until Hume s eventual
withdrawal of its offer.
 
An interesting observation on Hume s CAR is that the
price appreciation of about 40 per cent, which
occurred prior to the announcement, seems to be
permanent. This observation is consistent with the
information effect hypothesis, which states that if
a bid provides information to the market about the
true underlying potential of the firm, shareholders
will form unbiased expectation concerning the new
equilibrium value.
 
The Acquirer - KCB Table 3 presents analysis of KCB's 
returns during the announcement of its takeover of 
MPHB. Figure 3 shows the CAR of KCB's share. 
The table and the figure indicate that the KCB s 
prices fluctuate very wildly from the beginning of 
our observation period, that is day -50, until the 
announcement day, neither showing an uptrend nor 
downtrend.  However, after the announcement day, 
prices slide very steeply, still with significant 
volatility. By day 45, the CAR is about -20 per cent.
 
The poor performance of KCB s share after the
announcement of its takeover bid indicates that
investors viewed the move negatively. It is like a
zero (or even negative) net present value business
expansion project. Acquisition of this type brings
no economic gain to shareholders of the acquiring
firm.  In fact, due to costs incurred, it would have
negative impact on share prices. Considering the
thinly staffed KCB, the market certainly had reason
to doubt its ability to manage MPHB s array of
businesses. Further, at RM2.05 per MPHB s share KCB
might have overbid. This price is about 36 per cent
above Hume s offer price of RM1.50.
 
SUMMARY AND CONCLUSION
 
This study recounts the events surrounding the
hostile takeover attempt of Multi-Purpose Holdings
Berhad (MPHB) by Hume Industries Berhad. MPHB sought
a white knight in Kamunting Corporation Berhad (KCB)
to ward off Hume s attempt. The final chapter saw
KCB owning 29.8 per cent of MPHB, which was
previously owned by Koperatif Sebaguna Malaysia.
 
Evidence on price analysis indicates that although
Hume failed in its attempt, its price appreciated by
about 40 per cent. The evidence also indicates that
the target s (MPHB) share experienced a temporary
sharp increase, only to be wiped out after the
announcement. As for the successful bidder, KCB, the
market did not seem to attach any value to its
taking over of MPHB. Either the market did not
believe there is synergy in the merger, or KCB might
have overbid.
 
EPILOGUE
 
Following the takeover by KCB in 1989, a major
reorganization of MPHB took place in 1990.
Businesses and assets which provided a low or
negligible return on investment were sold, and
concentration on and expansion of the core business
of property development, financial services and
gaming were given emphasis.  Following this
strategy, in 1991, the group acquired a stake in the
stockbroking industry and widened its gaming
interest to include horse racing.
 
 
REFERENCES
 
Cheung, S (1992).  Chinese Controlled Companies in
the KLSE Corporate Research Services Sdn Bhd, Kuala
Lumpur.
 
Fauzias M N (1993).  An Empirical Study on the
Effect of Acquisition Announcement: the Malaysian
Experience Paper presented at the Fifth Annual PACAP
Conference, Kuala Lumpur.
 
Mansor M I (1994).  The Effect of Acquisition
Announcement and Method of Payment on Shareholder
Returns in the Malaysian Stock Market . Securities
Industry Review, Vol.20(1), 19-32.
 
Mansor M I and Lim L L (1993).  Share Price Behavior
Around Acquisition Announcement in Malaysia .
Capital Markets Review, Vol.1(2), 1-23.

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