Capital Recycling

For a while, Aunty Scroogey has been pondering how to explain the concept of capital recycling in an interesting way so that readers will not fall asleep while reading the article. This week, something interesting happened in the corporate scene which got Aunty Scroogey really excited because this is the perfect case study to highlight the aforementioned concept.

Let me start by telling you a story. Once upon a time, in a land not so far away, there was an old man who bought a pharmaceutical company from 2 of his cousins. The old man worked hard at growing his business and when he died, handed it over to his son, who brought the company to even greater heights. This son, in his old age, in turn passed the business to his 2 sons, Mal and Shiv. The 2 brothers did very well in managing the business, and led the company to become the biggest pharma company in the country. A few months before the collapse of Lehman Brothers in 2008, the 2 brothers sold their 34.8% stake in the company to a Japanese pharma giant for circa US$2.4bn.

At this point in time, you might be thinking that this fairy tale is rather interesting and the brothers are ‘lucky’. Well, this is not a fairy tale; it is a real life story. The 2 brothers mentioned are Malvinder Mohan Singh and Shivinder Mohan Singh, who used to own and manage Ranbaxy Laboratories Ltd in India, before they sold it to Daiichi Sankyo around mid-2008. It wasn’t by a stroke of luck that they decide to sell the company – it was by vision (if you are interested in details, google to read more).

The 2 brothers got their stake in Ranbaxy largely by inheritance, and assuming that there is no debt repayment involved, you might be thinking that US$2.4bn is a neat sum for them to sit pretty for the rest of their lives.  But they didn’t stop there. Instead they recycled their capital into areas that they knew well. Through their other company Fortis Healthcare, Mal and Shiv went on to buy 10 hospitals from a competing hospital group (Wockhardt) in India, and in March 2010, bought a 23.9% stake in Singapore listed Parkway Holdings Ltd from private equity group TPG Capital.

Word has it that the other major shareholder of Parkway, Khazanah – Malaysia’s equivalent of Temasek Holdings – was comfortable working together with TPG but not Fortis (for details, please google to find out more), thereby leading it to make a public offer at S$3.78 a share to raise its stake to 51.5% in Parkway. This was met with Fortis’ counter offer of S$3.80 a share. Khazanah in turn made a subsequent offer of S$3.95 a share, thus putting the bidding war to an end when the Singh brothers decide to cash out at that price. So, in less than 6 months since they bought their stake, how much did Mal and Shiv profit? A cool S$116 million. If you’ve always wondered why the rich gets richer, this is one reason why. Aunty Scroogey has earlier written about it here.

Exercise 1: Take a minute to think about this – If you’ve just sold an asset, what would you have recycled your capital and profits into? Most people have no idea, because they do not take the effort to educate themselves financially. Worse still, would you have dump the whole sum of money into setting up a business you are new to (erm… miracles do happen sometimes, but most of the time, they don’t), or even use it to buy a non-productive item such as a car? And most importantly, don’t forget to apportion it in the Big Money way lest you lose track of the amount spent.

Exercise 2: Mal and Shiv use Singapore as a base for their companies to become a pan-Asian healthcare leader. Indeed, being in Singapore, we are well-positioned to take advantage of the Asian growth story in the years to come. How are you preparing yourself to be a part of, and to take advantage of this in the next 3, 5, 10 or even 30 years? Or are you another one of those folks who just sit and complain about how things have become more and more expensive?

Think about it. Yes, do your own thinking and researching. This column is not about giving you the fish, it is about teaching you how to fish.

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About admin

I hail from a little red dot on the South China Sea call Singapore. Am an extroverted introvert and notorious for nothing and everything. I often suffer from logorrhea so please do not take what I say too seriously.

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