Salim's maneuvers

Salim's maneuvers

Seen from the business history and stature of the politically
well-connected tycoon Sudono Salim in Indonesia, the fire and, in
some cases, emotionally nationalistic outbursts drawn by the
latest corporate maneuver involving the publicly listed Salim
Group companies -- Indocement and Indofood -- are understandable.
Salim Group is nevertheless not the first Indonesian conglomerate
to shuffle assets to Singapore-registered or listed entities.

We could cite several reasons for the unusually strong
reactions. The timing of asset restructuring and "relocation" to
Singapore is raising eyebrows in view of the presidential
election in March. The move may lead many other big business
groups to suspect that the Salim Group, given its access to the
center of power, possesses some vital information about
Indonesia's political future.

Moreover, PT Indofood Sukses Makmur, which is to be acquired
by Singapore-listed QAF Ltd, still controls (through its
subsidiary PT Bogasari Flour Mills) Indonesia's wheat-milling
monopoly. The asset-shuffling, which is expected to be approved
at an extraordinary shareholders meeting next month, is the third
massive restructuring exercise by the Salim Group in the past
four years. Indocement is 25.7 percent government owned through
an equity capital injection in 1985 to help the company out of a
liquidity crisis. The transaction is so complex that the most
obvious fact to the public is a massive capital flight as the
$3.5 billion Indofood, Indonesia's largest noodle maker, is to be
swallowed by the $393-million QAF Ltd. in Singapore.

However, apart from nationalist sentiments, most analysts have
not questioned the business rationale of Indocement's divestment
of its 50.1 percent stake in Indofood and the injection of
Salim's majority shares in Indofood into QAF Ltd, which under the
complex deal is eventually to be majority owned by the Salim
Group.

The first benefit is that the deal will refocus Indocement on
its core business, cement manufacturing, and this will add value
to the company. With several new cement plants under construction
which will expand capacity from 10.9 million tons to 15.8 million
tons in 1999 and almost $410 million in fresh funds from the
divestment of its shares in Indofood, Indocement is geared up to
further strengthen its market competitiveness and its position as
market leader.

The move will also put Indofood in a better position, through
its Singapore-listed QAF holding company, to expand its
international markets. No one doubts that Singapore -- with its
modern, efficient infrastructures, more advanced financial
markets with tougher disclosure requirements, stronger law
enforcement and good governance -- offers many advantages as a
strategic corporate headquarters to raise international finance
and to launch regional and global market operations. It is these
advantages which have clearly been in the mind of other
Indonesian tycoons who have established corporate beachheads in
Singapore.

The Sinar Mas Group, Indonesia's largest pulp and paper maker,
has incorporated Asia Pulp & Paper Co. Ltd. in Singapore as the
investment vehicle and holding company for several of its
businesses in Indonesia. The Raja Garuda Mas Group, a diversified
pulp and rayon conglomerate, is represented in the island
republic by Asia Pacific Resources International Holdings Ltd.
(APRIL). The Barito Pacific Group, the forest-based group, owns
United Pulp & Paper Company as its holding company for global
operations. Several other Indonesian businessmen also have
acquired large stakes in Singapore-listed companies.

We do not see the asset restructuring related to any intention
on the part of the Salim family to relocate assets to Singapore
for fear of losing their powerful political connections in the
coming political succession. The assets are not portfolio
investments which can easily and immediately moved overseas but
are direct investments in plants, land and other resource-based
ventures. In fact, the Salim group is engaged in new major
investment projects in agrobusiness, property and many other
industries in Indonesia.

True, political connections count greatly when doing business
in Indonesia. But we do not think businesses of such stature as
the Salim Group, with over $10 billion in assets, still rely on
political connections for further growth. This will be especially
true once the ASEAN Free Trade Area begins in 2003. In fact, by
registering in Singapore, Indofood will be subject to stronger
disclosure requirements and tougher law enforcement which will
force it to be more accountable and transparent.