SGX Buying ASX

SGX will offer A$48 per ASX share 
- at 37% premium
- S$10b

• pays 55% of the deal in stocks
• pays 45% in cash = S$4.5b

SGX factsheet

• Market Cap $10b
• Dividend Yield 2.86%
• PE 34
• PB 12
• TTM Revenue $636m
• TTM Profit $320m
• Total Asset $2.1b
• Total Equity $0.85b

ASX factsheet

• Market Cap $6b
• Dividend Yield 4.95%
• PE 18.36
• PB 2.08
• TTM Revenue $580m
• TTM Profit $328m
• Cash only $1.24b
• Net Cash & ST Investment $3.45b

SGX is taking an 18 month bridging loan for this acquisitions. Given that ASX has $1.24 cash, essentially SGX will be forking out $3.26b cash. Also given that SGX share price is higher valued than ASX enables it to make a premium offer (due to the share exchange).



Looking at SGX's total asset and equity, the loan required to finance this acquisition is about 1.6x leverage of its total assets and 3.8x leverage of its equity. SGX is likely to issue rights after the share exchange with ASX.


SGX share price is expected to continue its downward pressure, which will in turn affect its share exchange ratio with ASX to maintain the $48 per ASX share. Overall, ASX is a good buy for SGX

Key take aways from Asian Financial Crisis

Extracted from one of the lectures.

1. Massive capital inflows attracted into the region during 1990s because of:
1. capital market liberalization in industrialized countries
2. Low interest rates in U.S. and Japan
3. High economic growth in region
4. Financial deregulation in region but not accompanied by adequate supervision (esp in Thailand)
5. Pegged nominal exchange rates reduced perceived risks for investors
6. Governments encourage foreign borrowings through tax incentives on income earned from foreign exchange loans
2. Signs that Crisis was Unpredicted
1. Capital flows remain strong through 96 till mid 97 (only exception were equity markets in Thailand and Korea
2. Risk premia on loans were low
3. Credit rating agencies did not signal risk until onset of crisis itself
4. Even Goldman Sachs did not signal a problem
5. IMF gave no indication of potential of crisis in region. October 97 WEO even predicted 6% growth for Korea in 1998, 7.4 % for developing Asia
6. Stock prices provide the only indication of growing concern. Thai and Seoul markets fell since Jan 1996. Malaysian market began to turn down in March 97, and Indonesian market show continued confidence til mid 97
3. Why unpredicted - Sound macroeconomic management
1. Budget balance
2. Inflation below 10% across region in 90s
3. Sovereign debt at prudent levels
4. Domestic saving and investment rates were high, implying that even if capital flow slowed robust growth could continue  
5. CA deficits were large but capital inflows larger so foreign reserves were actually growing across most of the region
6. Foreign exchange reserves at end of 1996 were well over four months of imports in each country except for S. Korea (2.8 months). In Thailand, reserves were $38.6 billion at end of 96, equivalent to 7 months of imports.
7. World interest rates low so the burden of repaying foreign obligations not onerous 
8. U.S. economy, a major market for most of Asia’s exports, robust
4. Signs of growing vulnerability
1. Growing current account deficit
2. Overvalued currencies (90‐97(I): real appreciation in all five countries
3. Slowing export growth (export growth fell sharply between 96 and 97)
4. Rapid expansion of commercial bank credit (much went into real estate markets)
5. Growing short term debt (currency mismatches plus loan maturity mismatches)—e.g. Indonesia, Korea and Thailand had ratios of short term debt to foreign reserves exceeding 1.0.
5. Triggering Events
1. bankruptcy in a decade); followed by Sammi Steel and Kia Motors. They put pressure on banks thro whom foreign borrowings flow through.
2. Samprasong Land missed payments in Feb. In next 6 months Bank of Thailand (BOT) lend $6b to distressed financial institutions. BOT also committed half its liquid assets to fight speculators acting against the Baht. Late 97, Thai govt removed support from Finance One (a major financial institution)—this led to withdrawal of foreign funds and prompted currency depreciation July 2. This caused the contagion effect on the rest of Asia.
6. Impact of Capital Outflow
1. Withdrawal of foreign funds triggered a chain reaction leading to financial panic
2. Exchange rate depreciation sparked new withdrawals
3. Few firms in Asia hedged their position as they were used to pegged exchange rates.
4. Withdrawals set off liquidity squeeze and sharp rise interest rates.
5. Sharp fall in stock markets further erode capital base of banks
7. IMF's Policy
1. Fiscal policy: to tighten in order to support monetary contraction and defend exchange rate and provide funds for injection into financial system
2. Bank closures: Thailand financial institutions 58/91, Indonesia closed down 16 banks, Korea 14/30 merchant banks suspended—to send strong signal of government’s intention to reform banking system
3. Enforcement of capital adequacy standards
4. Tight domestic credit: To raise interest rates to defend exchange rate
5. Debt repayment: Full payment of foreign debt obligations, backed by IMF mobilized bail‐out funds
6. Non‐financial structural changes: Reducing tariffs, opening up sectors for foreign investment, and reducing monopoly powers
8. IMF's Mistakes
1. The great speed of bank closures required led to exacerbation of credit freeze in the system
2. Tightening the quantity of money trigger a panic by short term creditors who come to doubt the ability and willingness of central bank to provide liquidity.
3. The higher interest rate that result did not stabilize the exchange rate but instead cause output contraction, rising unemployment and civil unrest (IMF predicted wrongly that rising interest rate would stabilize the exchange rate and the benefits of that would outweigh the social costs of output contraction)
9. Cause
Sudden massive capital outflow was the cause: Net inflow of $92.8b in 1996 to net outflow of $12.1 b in 1997! The $105b turnaround in one year is about 11% of Asian‐5
1. And not fundamental flaws in Asian economies such as ’crony capitalism”, widespread corruption, macroeconomic imbalances, weak financial institutions.
2. These problems exist but overstated. They have been known for years but yet they have attracted $211 b of capital inflows between 1994 and 1996.
2. Speculative capital flow reversal was the result of financial liberalization in 1980s and mismatch of short term foreign loans to long term domestic investments
1. On eve of crisis, Asian‐5 had a combined debt to foreign banks of $274b, 64% of which in short term obligations.
2. Depreciation of currency increases the cost of debt servicing. Once a currency depreciates, it does not take much to set off panic and rush for exits, especially when central banks do not have a high level of foreign reserves relative the short term debts. Foreign lenders refuse to renew the short term loans and the downward spiral continues.
10. Solution
1. rollover short term debts into loan term loans
2. to have a banker of last resort

Unemployment Rates in U.S.

The different measurements of unemployment rates:

• U1: Percentage of labor force unemployed 15 weeks or longer
• U2: Percentage of labor force who lost jobs or completed temporary work
• U3: Official unemployment rate per ILO definition
• U4: U3 + "discouraged workers", or those who have stopped looking for work because current economic conditions make them believe that no work is available for them
• U5: U4 + other "marginally attached workers", or "loosely attached workers", or those who "would like" and are able to work, but have not looked for work recently
• U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons (underemployment)

Arguably, the most reflective rate would be U6.

This is how the U3, U4, U5 and U6 look like historically (seasonally adjusted):

• U3

• U4

• U5 

• U6

Note that U4, U5 and U6 started from 1994 only. From U3's chart, we can see that the unemployment rate is similar in the 1980s. Wonder if the U4-6 charts in the 1980s would be similar as well.

In any case, the high U6 figure of 17% looks worrying.

How can employment recover?

One of the theory behind the recovery of the great depression was the start of WWII, where people are employed to manufacture weapons as well as participate in the war.


source of figures: http://www.bls.gov/webapps/legacy/cpsatab15.htm