Mergers and acquisitions reflect low valuations in the
Singapore stock market
3 July 2001
So the merger and acquisition activity in Singapore continues with United Overseas Bank jumping into the fray last week with a $10 billion bid for Overseas Union Bank, already the target of a $9.4 billion bid by DBS Bank. This comes after take-over bids by Celestica of Canada for Omni Industries and by Oversea-Chinese Banking Corporation for Keppel Capital.
Undoubtedly, the market has focussed largely on the financial sector M&A activity. Apart from the potential for a bidding war between DBS and UOB for OUB, the banking consolidation that results from these mergers is likely to have real economic impact on Singapore's financial sector. Market participants are also acutely aware that the funding requirements generated by these M&A activity, as well as the need to produce synergies and cost-savings, may induce the banks to accelerate their divestment of non-core assets, as required by the Monetary Authority of Singapore, with potential spillover effects on other sectors of the Singapore stock market, particularly the property sector.
From a wider perspective, these M&A plays reflect the undervaluation of the target stocks in particular and the Singapore stock market in general. Investors have been so fixated on the near-term economic outlook, which is bad, that stocks have been allowed to sink to very cheap levels. Of course, just because stocks in general are undervalued does not necessarily mean that they are ripe for a rally. The reality is that most investors are likely to remain focussed on the near term.
So what is the prognosis for the economy in the near term? Probably poor. Continued downgrading of Singapore's economic growth forecast for 2001 -- currently around 3.5 percent -- appears to be on the cards. Non-oil domestic exports have been in a downtrend over the past few months, and the recent uptrend in money supply appears to have been arrested by a fall in May. Recent signs of strength on the consumer front in the United States may not be as significant as the continued weakness in the high-tech sector, where much of the exports from Singapore and the rest of Asia goes to.
Therefore, the Singapore stock market will most probably continue to drift sideways -- supported by its cheapness as well as low interest rates -- until later in the year, when investors start to look at next year's economic growth.
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