BCA's sales controversy

BCA's sales controversy

Analysts agree that the combination of a second public
offering and private placement by a strategic investor is the
best option for divesting the government's stake in Bank Central
Asia with optimum results. Even the House of Representatives,
which rejected a similar divestment plan last year in defiance of
a government-IMF agreement, approved early this year the move to
sell 10 percent through a second public offering and 30 percent
to a strategic investor.

The second public issue, after the initial public offering of
around 20 percent in May last year, was considered about the
right size, given the bearish market condition, but not too small
to gauge market sentiment toward the bank.

However, both the second public offering and the bidding
process for strategic investors have been mired in controversy
and allegations of collusion and corruption against several House
members and executives of the Indonesian Bank Restructuring
Agency (IBRA). And upon strong demand from analysts, legislators
and the Oversight Committee of IBRA, the bidding for a strategic
investor will be reopened. What went wrong?

It is up to the Jakarta Stock Exchange watchdog -- the Capital
Market Supervisory Agency -- to investigate and judge whether
there had been insider trading in the 10 percent stake offered in
the second public issue at Rp 900 a share early this month,
compared to its closing price of Rp 925 in late May, when the
planned issue was first announced.

But the biggest controversy seems to center around the bidding
process for strategic investors for the 30 percent stake.

There are two main bones of contention against the bidding
process, which reportedly had resulted in two final bidders --
Newbridge Capital and Indonesia Recovery Company Ltd. (IRCL).
Both are investment companies.

The IRCL was alleged to be the investment vehicle of the Salim
family, the former founding shareholders of BCA, thereby
breaching the rule that bans former shareholders to increase
their stake. Mar'ie Muhammad, chairman of the Oversight
Committee, criticized the two final bidders as not the best
investors in BCA, pointing out that, as investment firms, they
would not bring in anything in the way of strategic alliances or
synergy for BCA.

One should indeed wonder why the final two bidders, which were
reportedly shortlisted from more than 50 initial bidders,
consisted of only two investment firms. Many foreign banks
interested in establishing a foothold or expanding operations in
Indonesia should be greatly keen in having a 30 percent stake in
BCA despite the political uncertainty.

After all, BCA, one of the jewels among the assets held by
IBRA, is the largest retail bank in the country with the most
extensive branch network, modern information technology, and
plays a vital role in Indonesia's payment system.

But the public has remained in the dark about the bidding
process, which started in May. Even I Putu Gede Ary Suta, the new
chairman of IBRA -- the controlling shareholder of BCA after it
took over the bank from the Salim Group in the wake of the
financial crisis in 1998 -- claimed he had not yet been informed
of the bidders. That was a bit strange. How could Ary Suta have
not learned of such an important program more than 23 days after
he took over the reins of the agency?

Lack of transparency, therefore, seems to be one of the main
reasons behind the controversy. Even though some degree of
confidentiality should be maintained in the tender process, there
are many things related to the process that can and should be
publicly announced to prevent unnecessary rumors and allegations.

The other main reason, we think, is the seemingly unclear
criteria of what IBRA expects from private placement: whether it
is proceeds from optimum sales (highest price) or strategic
alliances that should be given the greatest weight in the
assessment of bids.

But we think because BCA is still in the early process of
consolidating after its recapitalization in 1999, strategic
alliances with investors, who can bring in synergy, is the best
choice for the future growth of the bank. If that is the case
then the preferred bidders should be strong banks. Even though
Newbridge Capital did a wonderful job of turning around the Korea
First Bank less than 1.5 years after it took over that major
bank, most investment firms usually only have a medium-term
horizon for their investments. But strategic investors look to
long-term prospect through the synergy they bring to their
investments.

IBRA should take a great lesson from this case, the second
after the aborted sale of Bank Bali to Standard Chartered Plc. in
1999. Its divestment programs in the numerous companies it
currently owns, on behalf of the government, would always be
vulnerable to collusion, controversy or wild rumors as long as
the transaction process lacks transparency and is not based on
clear-cut criteria.