Today, on 10 January 2014, the long drawn water acquisition battle made a surprise turn. Kumpulan Darul Ehsan Berhad (KDEB) told the target companies, Punchak Niaga and Syabas, that they will be no further negotiations on the deal in the foreseeable future. The newspapers came out with two stories:

The Sun:  
PETALING JAYA (Jan 10, 2013): Shares of both Selangor water concessionaire holders Gamuda Bhd and Puncak Niaga Holdings Bhd were at odds yesterday on the Selangor state government's decision to throw in the towel on plans to take over the water assets in the state.

The Star:
Water concessionaires in Selangor, including Puncak Niaga Holdings Bhd and Gamuda Bhd, may be forced to accept Kumpulan Darul Ehsan Bhd’s (KDEB) offer to acquire their water assets in the state, following the Government’s decision to invoke Section 114 of the Water Services Industry Act 2006 (WASIA).

So, which one is right?

This is a classic mergers and acquisition exercise carried out by one of the very best in the field, Tan Sri Khalid and the following are why I think so:

1. Tan Sri Khalid is very clear about the principle of mergers and acquisition: maximizing value to KDEB. Tan Sri Khalid is on the side of KDEB, so he needs to get the best value for KDEB and in this case, getting the lowest cost possible. He is not consumed by the fact that he needs to complete the deal at whatever cost.

2. Acquisiton is about endurance. The one that can last the longest wins. Tan Sri made his offer many many years ago. Has he spent any significant amount? I don't think so. Has the acquiree spend anything - yes. Punchak Niaga and Syabas would have been making plans and taking on commitments (in terms of business and new ventures) on the possible cash windfall. Bankers may have been lining them up with cheap and easy loans in anticipation of the cash from the water sale. Now that there is no money coming in as expected, guess who is under pressure now?

3. Tan Sri set aside ego - the number one killer in M&A. More than 70% of the market-based takeover results in the acquirer losing value in the end. Mostly due to the rush to complete the deal and hubris (ego). Tan Sri did not cave in to the pressure not ego. He willingly 'walked away' from the table (but he is really not).

4. Take-overs is about using/leveraging external force to your advantage. The only internal power an acquirer has is money and if the acquiree sense that, the target company will milk that 'power' of money to the max. Tan Sri, while seeming to 'walk away', instead will be using the power of the law and federal government to make things happen; and that is free - no legal fees involved. The government will pay for all the paperwork and legal actions to invoke section 114.

5. Acquisition is about valuation, a fair valuation. By riding on section 114 together with the federal government, KDEB is resting the burden of finding a fair value at the hands of the federal government. And since the valuation is going to be done together with the water assets that the federal government wants to acquire, Tan Sri would also be able to know the valuation of the acquisitions by the federal government and in a way 'scrutinies' or disclose any massive over-valuation . Their last offer was RM9.65 billion for the Selangor water assets and if going by the federal government's valuation of other water asset acquisition would cause a significantly higher amount, Tan Sri would be able to use that to discredit the federal government ability in getting a good value for its acquisition. Therefore, for political reasons, the federal government may also be limited in their valuation of the water acquisitions.

6. M&A is about who can get it done.  Water is a monopolistic asset. As such, it would be difficult to find an agreeable price and it would take the the might of the government to get it done. By stapling the Selangor's water deal to that of the federal government, KDEB's chance of getting the deal done is almost as high as that of the Federal Government. The government has to approve both or none.

In summary, I think Tan Sri was brilliant to call their bluff, that he made the acquiree wait and seem to get greedy and wait some more, the acquirees start making commitment and then KDEB pull the rug under their table. That was his run and now he has a chance to rest as Tan Sri has passed the 'baton' to the federal government. The target companies? Well the race has not ended yet as they now have to run with the federal government while now having to 'turn the tap' back on as they can no longer blame any water woes on the Selangor government.

Brilliant, simply brilliant.

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