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.