Business Leaders: Story and Principles (1)

Business Success Story
The economy of Indonesia has grown fast since recovering from the Asian financial crisis of 1997-1999. Though this crisis put Indonesia’s economy into deep water, some new entrepreneurs, such as Daniel Budiman, Benny Benny Subianto, Sandiaga Uno and Sugiono, emerged from it and were able to start up and expand their businesses, reaching great heights. They had faith that Indonesia, with its huge resources and multiple opportunities, would become a re- emerging “tiger” nation.

Daniel Budiman and Sandiaga Uno run private equity companies, a relatively new form of business in Indonesia. A private equity company is one which acquires an unhealthy company, pours capital into it to improve its performance to become a healthy and excellent company, and then sells it on again to a new owner. PT Pangansari, Bank Tabungan Pembangunan Nasional (BTPN), Adaro and Mandala are examples of companies which were taken over by private equity companies.

In terms of buying out, mergers and acquisitions, there were 3 phases, as highlighted by Sandiaga Uno.

Phase 1 (1997-1999): buying low and selling high. This can be achieved in the right conditions, i.e. when capital is scarce and competition is limited.

Phase 2 (2004-2007): financial engineering and cost cutting (2004-2007). This was achieved when cheap funding was available and it was a golden period for buying out. In this period, PT Pangansari was acquired by Daniel Budiman, BTPN was acquired by Sandiaga (both of them are already sold), and Adaro was acquired by Benny Subianto and his friends (including TP Rachmat and Sandiaga). Adaro is now the most valued private mining company in Indonesia.

Phase 3 (2008-now): buying high and selling even higher. The environment is that sellers are getting smarter, good assets will get auctioned, so buyers must take a “hands on” approach and add value to the business. Mandala Airlines is the latest example of a high profile buy out. It was acquired by Sandiaga and is now being restructured after being non-operational for several months.

Generally, when taking over a company, private equity companies do not always use their own money to invest in the acquired company. Instead, they usually lend from banks (with certain percentage limitation) to leverage the multiplying effect of capital gain. For instance, when PT Pangansari was acquired by Daniel Budiman, he obtained a loan from Bank Danamon to the value of 80% of the acquisition price (but nowadays it is much more difficult to obtain loan for company acquisition). Here is the process using a simple math calculation:

Value of acquired company = 100. For the next 3 years, after restructuring and the value of the company will be 300. If using its own equity, the capital multiplier will be 300/100 = 3 times. And yet, if using 70% of loan with flat annual interest 15% (own equity is 30), the added value of company will be 300 – 70 (1+15%)^3 = 193 and the capital multiplier now will be 193/30 = 600% more!

The diagram below shows the Jakarta Stock Exchange (IHSG) and how the value of public companies tends to be increase year on year. The key to success is how to restructure and improve the fundamental performance (not only financial number!) of the acquired company, so that its value can multiply in the near future.

Source: Finance Yahoo

PT Pangansari is a good example for analysis. The company has a very specific business, providing and serving meals to all PT. Freeport operations in Papua. It provides 80,000 package meals every day to employees who work at headquarters, in the field, and even in the mountains. The business value is USD 60-70 million per year!

Sugiono is an interesting case. He has an expanding business, a chain of mobile phone stores. He started his business in 2003 with 2 shops in Oke Trikomsel in Jakarta. Over the next 7 years he expanded his business to a total number of 800 shops, and he holds the official license as distributor of the major mobile phone principles, i.e. Nokia, Blackberry and iphone. He has a vision to provide a digital lifestyle to Indonesians, whose annual income has increased significantly in recent years. A digital lifestyle is an unstoppable wave, proven by the ever-increasing number of social network users and internet penetration throughout the world. To continue to fulfill his vision, he also acquired Aora TV, a pay TC channel which had been dormant for several months.

to be continued... Principles of Business Leaders