UNIVERSITI UTARA MALAYSIA

COLLEGE OF BUSINESS

BWFF 5053 ADVANCED CORPORATE FINANCIAL MANAGEMENT

ASSIGNMENT 4

DKSH MERGER & ACQUISITION

PREPARED FOR:

ASSOC PROF. DR AHMAD RIZAL MAZLAN

PREPARED BY:

BARATHITASAN SANJEVEN 828939

KANIMOLI SEGAR 828954

Mergers and acquisitions (M&A) refer to transactions between two companies combining in

some form. Although mergers and acquisitions (M&A) are used interchangeably, they come

with different legal meanings. In a merger, two companies of similar size combine to form a

new single entity. On the other hand, an acquisition is when a larger company acquires a

smaller company, thereby absorbing the business of the smaller company. M&A deals can be

friendly or hostile, depending on the approval of the target company’s board. Mergers and

acquisitions (M&A) are important business strategies for the growth and development of the

firms. M&A have grown over the years both in volume and value. There are different types of

M&A deals and each deal is unique in nature. So, the motives behind each deal differ one

from the other as its followed by Mergers, Acquisition, Consolidation, Tender Offers,

Acquisition of Assets & Management Acquisitions. This paper focusing on acquisition of DKSH

and following section, will focusing on synergy, type of M&A, adviser, companies (Bidder /

Target), purpose of M&A, time of implications & challenges.

COMPANY BACKGROUND

DKSH is one of the oldest and largest Market Expansion Services providers in Malaysia, which

is established in 1923 in Penang. DKSH Malaysia’s history extends back to 1867, when three

enterprising managers left the Borneo Company Ltd. to start up on their own. Pooling their

experience and expertise, Samuel Gilfillan, William Adamson, and H.W Wood set up Gilfillan,

Wood & Co. in Singapore. In 1886, Archie Charles Harper arrived in Selangor as its first

European trader. He set up A.C. Harper & Co., initially to import horse fodder. Harpers Trading

(Malaysia) Sdn. Bhd. was incorporated in December, 1974, as the trading arm of the Harper

Gilfillan Group. Harper Gilifillan later sold its interests in Malaysia, including Harpers Trading

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(Malaysia), which was purchased by Diethelm Keller (now known as DKSH Malaysia Sdn Bhd)

in 1987. In December 1994, the company was publicly listed on the Main Board of Bursa

Malaysia.

DETAILS OF THE M&A OF DKSH

DKSH Holdings (Malaysia) Bhd has proposed to acquire the entire equity interest in Auric

Pacific (M) Sdn Bhd for about RM480.91 million which is equivalent to S$157.67million on 21st

December 2018. The acquisition would be made via its Singaporean unit, DKSH Holding (S)

Pte Ltd with Auric Pacific Marketing Pte Ltd and Centurion Marketing Pte Ltd. In a filing with

Bursa Malaysia, DKSH said the market expansion services provider said Auric Pacific was one

of the established players in the distribution of chilled and frozen products and in the food

services channel in Malaysia.

On March 29, 2019, the Group completed the acquisition of Auric Pacific (M) Sdn. Bhd. (“Auric

Pacific”), now known as DKSH Food Services (M) Sdn. Bhd. DKSH manage to acquire the stated

company within 4 month period which is equivalent to 1 quarter of financial year.

This strategic and purpose of acquisition was made in order to expand the Group’s market

share and own brand portfolio. Auric Pacific had a strong presence in the foodservice channel,

serving hotels, restaurants, and cafes throughout Malaysia; and in chilled and frozen products

in both foodservice and grocery channels. This includes own brands such as Buttercup and

SCS Butter which are market leaders in the mélange and butter categories. In addition, Auric

Pacific represented several well-known and successful brands that were a natural

complement to the Group’s existing portfolio.

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The integration of Auric Pacific was fully completed by September 2019 and cost efficiencies

and synergies between the businesses have already been realized over the first three quarters

of consolidated activities. Due to the similarity of operations and complementary nature of

channels, this acquisition gave the Group the opportunity to significantly increase the market

presence in chilled and frozen products, and the foodservice channel, increasing the return

on sales, while bringing efficiencies in operations, and developing synergies in products in

both the newly acquired brand portfolio and the Group’s existing portfolio. Sales have

exceeded expectations and have been at elevated levels since the acquisition. When coupled

with the cost efficiencies realized by leveraging on the Group’s existing operations, operating

profit exceeded the financing cost associated with the acquisition.

As per the DKSH, this acquisition completed under Horizontal merger due to the similarity of

operations and complementary nature of channels, this acquisition gave the Group the

opportunity to significantly increase the market presence in chilled and frozen products, and

the foodservice channel, increasing our return on sales, while bringing efficiencies in

operations.

CHALLENGES FACED

DKSH faces obstacle in the term of planning of improvement to the acquisition of Auric Pacific,

a significant improvement project was carried out in this sector to boost the FMCG business's

profitability. In the fourth quarter of 2018, work on this project began, and it continued

throughout [Link] the course of 2020, the procedures and operations of the project will be

incorporated into the standard method of operation .While some benefits were realized in

2019, the majority will be realized in 2020 and into 2021. All one-time costs were recognized

in 2018 and [Link] client portfolio, route-to-market development, sales force

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efficiency, inventory management, organizational structure, cost management, accounts

receivable management, and many other aspects of working capital and profitability-related

process improvement were the primary goals of this project.

In addition, another challenge, faced by DKSH during the M&A is during the COVID-19

pandemic and the associated Movement Control Order (MCO) in Malaysia from March 18,

2020 onward marked the first and second quarters of [Link] market has been significantly

affected by this development .To ensure that essential healthcare and FMCG products could

continue to be serviced, the Group had developed comprehensive Business Continuity Plans

and swiftly implemented them .Throughout the various phases of the crisis response, we

prioritized the health and well-being of employees and stakeholders while ensuring that

operations continued at the highest possible levels. The short-term impact has been minimal

due to the Group's well-diversified portfolio, which includes numerous essential grocery and

healthcare products .The Group was planning cautiously in the event of a general economic

downturn, but it is also making sure that no opportunities for product innovation, business

development, capturing cost efficiencies, and improved human resources practices are

overlooked. However, the longer-term effects on the market are unknown.

DKSH take a cautious approach to cashflow management and have prioritized retaining cash

in the business in order to be well prepared for unexpected impacts from the COVID-19 crisis

because the longer-term market effects of the pandemic are unclear .The board has reviewed

the cashflow forecasts that the management has looked at with a conservative eye, and they

have decided not to pay a dividend for 2019 in order to be more cautious and save money on

financing .Throughout the year, the board will evaluate the current market and cash position

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and, if necessary, consider an interim dividend .The Group is optimistic about medium- to

long-term growth opportunities despite current uncertainties.

IMPLICATION OF M&A

DKSH Holdings (M) Bhd’s stocks spiked up almost 5% in early trade Monday after the company

said it is buying Auric Pacific (M) Sdn Bhd. for an initial price of S$157.67mil (RM480.91mil).

The counter, of of the top gainers on Bursa Malaysia, rose 4.91%, or 11 sen to RM2.35. DKSH

announced that it is acquiring the entire equity interest in chilled and frozen products

distributor Auric Pacific (M) from Singapore-based Auric Pacific Group Ltd (Auric Group).

OWN ANALYSIS ON DKSH M&A

• Success in M&A is acquiring the right firm.

This may seem an obvious one, but for something which is supposedly so obvious, every year

literally thousands of companies fail to observe it when conducting mergers or acquisitions.

Not all M&A are leads to success and profitability. This may be because there’s a bias at the

heart of M&A. As soon as we make the decision to acquire a firm, we’re wired to believe that

success means closing an acquisition. Overcoming this problem, specific firm may require to

step away from the process entirely if don’t encounter the right company in your search.

But in our perusal, DKSH went through financial analysis to forecast the success rate with the

acquisition. DKSH analysed on Auric Pacific stability on market before deciding to do

acquisition. DKSH claimed that the acquisition was in line with its horizontal integration

strategy, which calls for the company to make additional strategic investments in its market

expansion services .DKSH will be able to expand its product line thanks to this, which is

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expected to boost the company's earnings and create a synergy effect due to their similar

FMCG businesses, DKSH and Auric. From the date of acquisition, Auric Malaysia contributed net

sales amounting to RM262,000,000 and a combined profit after tax of RM29,038,000. Assuming the

business had been acquired as of January 1, 2019, the contribution for the net sales would have been

RM349,000,000 with a corresponding profit after tax of RM38,717,000 as of December 31, 2019.