HARDLY three weeks after its Valentine's Day listing, Symphony House Bhd has created a minor stir on the share market with its proposed acquisition of Malaysian Issuing House Sdn Bhd (MIH) for RM2.45 million cash. It was, by far, the most active counter on the Kuala Lumpur Stock Exchange (KLSE) on Wednesday (the day the announcement was made) and Thursday.
By listed company standards, the deal is not huge. Furthermore, the issuing house business is way off the peak of 1996 and 1997, when there were 92 and 88 initial public offerings (IPOs) respectively ; last year, there were 51, the most since the Asian financial crisis. So, why the excitement?
Some observers say the large daily volumes and high price on Thursday, the shares closed 85 per cent above the issue price of 50 sen may be the result of exuberance rather than sober investment decisions.
They argue that the counter has seen a lot of action because people are convinced that Datuk Azman Yahya, the main shareholder and group chief executive, will lead the company to bigger and better things. The feeling is that it is the man's reputation that is mostly driving the buying and selling of Symphony stocks.
Then again, investment is also about expectations. After all, the Symphony business model has interesting possibilities and the company has thus far been quick to execute its plans. The move to acquire MIH reinforces this perception.
But Azman is unwilling to link the deal with the strong share movements since Wednesday. Instead, he believes that much of the volume is due to institutional interest sparked by a road show he did in Hong Hong earlier in the week.
He points out that Symphony is unique among Mesdaq companies in that it has more institutional than retail shareholders. Which is good because it reflects our strong fundamentals. They (the fund managers) really analyse and go into the details. Before the company was listed, there had been another road show in Singapore.
According to Azman, the fund managers he met in Hong Kong appreciate that Symphony is a defensive stock: recession or not, the corporate services work keep flowing.
The fund managers also find several other things appealing about the company its low-resource, high-margin business; governance structure; earnings growth and dividend yield.
I think the thing they like most is the fact that we made an effort to go and meet them. We tell them about the company and we were prepared to take any questions. That means we're confident and we know what we're talking about, he explains.
Azman adds: And some of these fund managers I've gone through a number of IPOs of large companies are not easy to handle.
Nevertheless, the wooing goes on. It is always useful for a listed company to have strong institutional shareholders, especially when it goes back to the stock market to raise money.
Indeed, shortly after the company had announced the MIH purchase on Wednesday evening, Azman was in a conference call with investors to talk about the deal. The initial round of questions would have probably centred on the rationale of the move.
That is the easy part. For most people, the explanation in the company's announcement through the KLSE alone is good enough. It says MIH is one of Malaysia's two licensed issuing houses the other is MIDF Consultancy & Corporate Services Sdn Bhd (MIDFCCS) and has a market share of 62 per cent in terms of IPOs handled last year.
The announcement adds: The proposed acquisition will enhance the range of services offered by Symphony, making Symphony the only fully integrated corporate services company in Malaysia providing share issuance, share registration, secretarial, accounting, nominee and trustee services.
The announcement also mentions potential synergies such as cross selling of products, merging of services, economies of scale and more efficient use of resources through sharing of backroom operations.
Azman says Symphony chose to buy MIH because of its bigger market share and its track record in coming up with information technology-based service features such as electronic share balloting and electronic share application.
It's quite advanced in that sense. This fits our organisation well. We like a company that's quite progressive.
He offers an example of how the MIH operations can boost Symphony's other businesses. A client that uses MIH for its IPO is immediately a strong prospect for Symphony's share registration and secretarial services. And this may lead to dealings with other businesses in the group, including the information technology division.
This is a big plus point because the issuing house business, on its own, is not terribly exciting. According to the prospectus for Plus Expressways Bhd, whose IPO last year was easily one of the biggest in recent years, MIDFCCS' fees for its part in the exercise were RM300,000.
Considering that the other IPOs are on a significantly smaller scale and that investor interest in new listings is still lukewarm, it appears that the two local issuing houses are operating in a challenging environment.
A news report last year quoted a top MIH executive as saying that the company made a net profit of RM8 million in each of the boom years of 1996 and 1997, and that it broke even in 2001.
It is worth noting that the MIH shares are changing hands at just below par value. One research outfit points out that this suggests that Symphony has bagged a great bargain, or that MIH has low earnings or is making losses.
In its announcement through the KLSE, Symphony House says the details will be provided after the execution of the relevant agreements. Azman says MIH has net tangible assets of over RM6 million and there are plans to reduce this by declaring dividends prior to the purchase. It's sitting on a lot of cash. It has made good money in the past.
But what about the future then? Symphony's plans for MIH do not call for drastic changes. It is licensed to carry out an issuing house business. You can't really move away from that, Azman says.
The priority is to explore ways to improve the issuing house process. One key objective is to achieve full computerisation so that the balloting can be done away from the MIH premises if the client wants it that way.
Another target is to slash the time to market from the issue of the prospectus to actual listing. This will involve working and sharing information with other players such as investment banks and Malaysian Central Depository Sdn Bhd.
Azman points out: If we can further shorten the processing time, we'll reduce the risk to the underwriters and help our clients to obtain the funds.
It is clear that Symphony will do some more shopping over the next couple of years or so. The company has earmarked RM8 million of its IPO proceeds for acquisitions.
We've hardly used the proceeds. It's only now that we're using some to buy MIH. We're cashflow positive; every month we rake it in from our business. So we still have plenty of ammunition for some acquisitions, says Azman.
Little has been revealed about Symphony's acquisition strategy other than it has identified some competitors in the corporate services field. The company is also talking about vertical integration but Azman declines to gives details.
At the same time, Symphony will continue to bank on aggressive marketing to drive its growth. It believes that there is plenty more work, especially in backroom operations, that it can do for existing and new clients.
Things are getting more competitive. You have to make sure you extract as much value (as possible) from your customer base. Of course, you provide services to these customers, Azman explains.