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PLM DBA 721-Strategic Issues Claro G. Ganac
PAMANTASAN NG LUNGSOD NG MAYNILA
Strategic Issues about San Miguel Corporation
Submitted to
DR. RONALD M. PASTRANA
In partial fulfillment
of the requirements of
DBA 725 -- Strategic Issues and Decisions
By
Claro G. Ganac
PLM DBA 721-Strategic Issues Claro G. Ganac
STRATEGIC ISSUES ABOUT SAN MIGUEL CORPORATION
“In April 2012, we completed our investment in a significant stake in Philippine Airlines … In
our view, this investment in our flag carrier strengthens our long-term competitiveness…
While some investors are not comfortable with the PAL investment, we are confident
that once our overall strategies are fully implemented, more will come to appreciate
this investment.”
SMC Chairman Eduardo Cojuangco Jr.,
2012 Annual Report
I. Introduction
In the phenomenally successful book “In Search of Excellence”, Peters and Waterman have
observed that excellent companies “stick to the knitting”, meaning that they stick to
businesses that they know best and where they have advantages and strengths.
This book presented the results of a research project conducted from 1979 to 1980
undertaken by the McKinsey consulting group. They investigated the qualities common to
the best-run companies in America. After selecting a sample of 43 companies from six major
industries, they examined the firms’ practices closely.
This paper seeks to examine the recent corporate strategies of San Miguel Corporation, one
of the country’s largest and most diversified publicly listed companies.
From principally a food and beverage and secondarily a packaging conglomerate, it has
diversified into oil refining and marketing, power generation, tollways and expressways and
other ventures that have no backward or forward linkage nor similarity with its traditional
core business. It also acquired controlling stake in Philippine Airlines and its low-cost carrier
subsidiary in 2012 from the Lucio Tan Group.
Observers have noted that San Miguel has been on a buying binge, and had targeted PAL --
Asia’s first airline – as a crown jewel of all its acquisitions. Half a year into the purchase
under SMC’s management, it inked an agreement for the purchase of 64 planes from
Airbus, which had put PAL into huge liability.
In September this year, SMC later on had to relinquish control and re-sell back to Lucio Tan
Group for US$1.3 billion. In newspaper reports in the wake of this development, SMC
President Ramon S. Ang admitted that San Miguel lost money on the deal.
This episode in San Miguel’s corporate evolution has sprung open serious questions about
the strategic directions that the Cojuangco and Ang management team has aggressively
PLM DBA 721-Strategic Issues Claro G. Ganac
taken under its helm in the last 10 to 12 years. In numerous media reports, Ang has been
quoted (some observers will probably note as boasting) that SMC will undertake ventures
such as constructing a new airport in Metro Manila and going into partnerships with foreign
partners, often seemingly without the benefit of a feasibility study (which may take a year or
two).
Is the Management of SMC engaging in wheeling-and-dealing to the possible threat and risk
of loan default? Is SMC expanding too aggressively and imprudently in industries and areas
where it has no competence or strategic advantage? Can SMC still absorb more loans and
debt so that it can fund speculative ventures?
These are the questions that have clouded the minds of even experienced professional
investors. These concerns have fueled anxieties and have translated to lower share
valuations compared to SMC’s peer conglomerates.
A. Objectives of the Paper:
This paper seeks to quickly examine the transformation of San Miguel into an investment
and holding company and to assess the diversification efforts into various non-core
industries where it has ostensibly no technological competence (being primarily a beverage
and food corporation) and operational advantages. It also seeks to:
a. Analyze the effect of the expansion and diversification program in terms of the
behavior of share price (as a proxy for shareholder wealth) and investor sentiment.
b. Examine the impact of the expansion on the balance sheet of SMC.
c. Make an over-all evaluation of the validity of the strategic moves of SMC from the
perspective of the Resource-Based theory of firm growth.
B. Scope and Limitations of the Study
This paper undertook examination of the corporate actions taken by the current
management of SMC in relation to its diversification program. Admittedly, it lacks
comprehensive rigor and more in-depth investigations due to time constraints.
The questions posed above in the background introduction certainly will required greater
effort and research into data that are not available in existing statistics and disclosures by
the company and interested parties.
In view of data availability limitations and time constraints, the student has instead limited
the analyses based on the above objectives. The analyses are based on cursory
manipulation and evaluation of available data.
The source of data is mainly secondary using online data sources such as the Financial
Times online resource, Thomson Reuters, newspaper and media accounts, San Miguel
Corporation’s website and corporate annual reports and other available information.
PLM DBA 721-Strategic Issues Claro G. Ganac
II. Strategic Shift:
Under the leadership of Cojuangco and Ang as Chairman and President, respectively, SMC
has undergone a major strategic shift, streamlining and broadening its business portfolio,
reshaping and redefining the very nature of its core businesses.
The sale of both Coca-Cola and Nestle was part of the new management’s effort to
restructure the San Miguel Group and focus its technological, managerial and financial
strengths to ventures where it believed it could add the most value. The proceeds of the sale
of these assets provided it with a cash warchest that it later on deployed into substantial
diversification program. It also implemented cost-reduction efforts, including an
organizational streamlining and rightsizing program.
While the company has stayed in its traditional business of food, beverage and packaging
and expanded through regional acquisitions and integration, it also made inroads into non-
related businesses and non-core geographic markets.
San Miguel's first major acquisition under Cojuangco and Ang was Australian boutique
brewer J. Boag and Son for A$96 million in 2000. It also expanded into ASEAN countries
when it paid $97 million for Thai Amarit Brewery Ltd. and $35.5 million for food processor
TTC (Vietnam) Co. in 2003. In 2004, it bought 51 percent of Berri Ltd., Australia's top
juicemaker, for $97.9 million.
To shore up its war chest, San Miguel spun off its brewery business into San Miguel
Brewery Inc. and took in Japanese brewer Kirin Brewery Co. Ltd., which bought a 15-
percent stake for $540 million in 2002.
In 2005, the company made its biggest overseas acquisition with the takeover of National
Foods Ltd., Australia's largest publicly traded dairy, which it bought for P80.38 billion. That
was followed later in the year with its $420-million purchase of Singapore-based Del Monte
Pacific Ltd., the region's largest pineapple canner.
In 2006, San Miguel has sold its 65% stake at its Coca-Cola Philippine venture (including its
subsidiaries Cosmos Bottling and Philippine Beverage Partners) to The Coca-Cola
Company (TCCC) for $590 million.
In Australia, San Miguel merged National Foods' operation with Berri. It subsequently let go
of its Australian business holdings which enabled it to generate one-off financial gains. In
November 2007, SMC sold Boag's to Lion Nathan for A$325 million. The same month, it
also sold National Foods to Kirin for ¥294 billion.
These financial maneuverings signaled the full transformation of SMC from an operating
company to a holding and investment company. This meant that it became active in
acquisitions, mergers and divestments of non-related but corporate and financial assets for
future financial gains.
PLM DBA 721-Strategic Issues Claro G. Ganac
While the global financial meltdown of 2008-2009 sent many companies into full retreat, San
Miguel Corporation powered ahead, investing mightily in a strategy to reaccelerate growth
and improve margins.
In rapid succession beginning late 2008, SMC bought up shares in power retailer Meralco,
paid up for the option to own oil refiner Petron, and acquired a majority stake in Liberty
Holdings, a Filipino telco co-owned by Qatar Telecom.
Forays into infrastructure have been successful, with San Miguel now participating in
several large-scale projects. It acquired a controlling stake in Citra Philippines, the owner-
operator of the Skyway 1 and 2, and a significant shareholder in the subsidiary that operates
the South Luzon Expressway. Thus, it has directly positioned itself against the Metro Pacific
group which is the concession owner of the North Luzon Expressway and is active in the
bidding for PPP infrastructure projects.
Chart 1. The SMC Group’s Business Interests
PLM DBA 721-Strategic Issues Claro G. Ganac
It bid for and acquired the concession for the construction of the P19 billion, 88.5 kilometre
two-lane Tarlac Pangasinan La Unión Expressway which began April 2010; at present, the
project is mid-way to completion, with the portion of the highway up to Rosales, Pangasinan
now open. TPLEX is the first of 3 road projects that Ang has on stream.
In October 2010, SMC finalized a deal to acquire 51% interest in Universal LRT Corp. Ltd.,
the company in charge of developing the Metro Rail Transit Line 7 (MRT7). It also acquired
the concession to build the Skyway Stage 3 which will connect NLEX and SLEX in 2012. Its
subsidiary Transaire Development also acquired the PPP project for the modernization of
the Caticlan Boracay Airport.
In a relatively short period, the company’s energy subsidiary San Miguel Energy has
become the largest power producer in Luzón. It now owns the 1000 MW Sual power plant,
the San Roque hydropower plant and the 600 MW Limay power plant.
Mining is another industry that Ang has been keen to enter. In early October 2010, SMC
bought 10% of Australia’s Indophil Resources, NL, a company which owns a 37.5% stake in
the Tampakan copper-gold project, the Philippines’ largest.
SMC has also expanded its oil and energy business with the purchase of Esso Malaysia
Berhad (65%), ExxonMobil Borneo Sdn Bhd (100%) and ExxonMobil Malaysia Sdn Bhd
(100%) for US$577.3 million.
In April 2012, SMC bought a 49% minority stake in Philippine Airlines (PAL) Holdings, worth
US$500 million, to revitalize PAL and Air Philippines. As reported earlier, SMC had to
relinquish and sell-back this stake to the Lucio Tan Group, but not after making a billion-
dollar deal with Airbus for a massive refleeting program.
In between these aggressive ventures, SMC bought a 33 percent stake in the Philippines’
largest power distributor, Meralco, in 2009. In 2013, SMC sold off this Meralco share block
and enabled it to book a P40 billion gain which provided a hedge against the effects of the
appreciation of the US dollar in the second half of 2013. These earnings completely offset
foreign exchange losses arising from dollar-denominated debt amounting to about P15.6
billion, brought about by the strengthening of the US dollar in the second half of 2013. (SMC
Press Release, March 27, 2014).
Moreover, SMC owns the medium-sized Bank of Commerce through its property subsidiary,
San Miguel Properties Inc.
PLM DBA 721-Strategic Issues Claro G. Ganac
III. Issues and Challenges About SMC’s Diversification Program
SMC’s Management has been explicit about its overarching goal and direction to maximize
the Company’s value and profitability. In the 2013 Annual Report, Chairman Cojuangco
rationalized and explained why it has aggressively pursued its diversification program:
“As one of the country’s largest conglomerates, with a history that stretches back 124 years,
we recognize that the value of our business lies in sustaining the Philippines’ growth. It is
precisely for this reason that we have anchored our diversification on projects that will help
improve the lives of our countrymen and bring about progress.”
This is an explanation why SMC had ventured into infrastructure development and
concessions, power, oils and fuels, airlines, mining and banking. These are areas where
SMC had heretofore not engaged in as businesses prior to 1998 when the new
management team came on board.
In the initial years following its diversification into non-core businesses, SMC showed better
financial performance. But by 2010, the diversification program became more speculative
with acquisitions into ventures where there are no significant cash income streams and
which required huge capital outlays (which by virtue of time constraints, the student could
not dig into and present for the purpose of this study). These ventures resulted in critical
issues and challenges that have put into question the validity of the diversification program.
Below are the key issues:
A. Reduced cash flows
SMC’s acquisition of Petron – one of the country’s largest companies in terms of sales
revenues – and the Sual power plant and another generating asset enabled it to
consolidate these latter company’s profits into the company’s profit statement. Thus,
from net earnings of P8.63 billion in 2007 at the time of the announcement of its
diversification program, this jumped more than six-fold to P57.8 billion (P19.20 per
share) in 2009.
However, SMC could not sustain this quantum leap improvements in profitability
because it continued its “buying spree” at the same pace, participating and winning bids
in infrastructure ventures and concessions which are more developmental and have long
gestations than the previous investments in fully operational companies. Thus, EPS
nosedived from P19.20 in 2009 to less than P6 in 2010, and further down to P5.00 in
2011 (See Chart 2).
Cash flow dropped to –P85 billion in 2010 from more than P100 billion in 2009 as it felt
the burden of new (non-revenue contributing) acquisitions and investments. Net cash
flows from traditional businesses and the new operating subsidiaries were wiped out in
2011 and 2012.
PLM DBA 721-Strategic Issues Claro G. Ganac
Unlike the Petron and power plant investments, the new projects are highly unlikely to
contribute to cash flows earlier than 4-5 years. The Skyway Stage 3 project and the
NAIA Expressway project were acquired at huge upfront fees to the Government.
Chart 2. SMC Earnings Per Share and Cash Flow (2009 – 2013)
(Source: © The Financial Times Ltd 2014;
http://markets.ft.com/research/Markets/Tearsheets/Summary?s=SMC:PHS)
B. High leverage positon and balance sheet effects
The acquisitions made by SMC in new companies and in concessions in infrastructure
and power generating assets have forced it to avail of a high level of debt when its cash
hoard arising from the divestment from Coca-Cola and Nestle Philippines has been used
up in the wake of its buying binge.
A number of stock market brokers and analysts, including the World Bank, have
sounded alarm bells as to a possible SMC debt default considering the high gearing
levels breached over what is rationally considered as prudent. It is now the country’s
largest private borrower with over P600 billion in interest-bearing long-term debt.
Debt-to-equity ratio is 2.56 as of the end of 2013, from 0.82 in 2009, as net debt nearly
quadrupled from P160 billion to over P600 billion over the four-year period. This
dramatically shows the huge burden of the diversification program.
PLM DBA 721-Strategic Issues Claro G. Ganac
In the 2013 Annual Report, Chairman Cojuangco admitted that concerns about the
Company’s leverage position on its risk profile which has extended into its share prices:
“We also faced head-on issues that resulted in a decline in our share price. In the
area of debt management, we have taken great care to proactively manage our
liabilities by availing of lower interest rates and longer payment terms. We have been
able to draw up a more flexible repayment schedule that closely matches the
targeted completion of major projects. In short, we will be using mostly income or
savings generated from our new projects to service our debts. Today, our net debt-
to-EBITDA ratio is at a healthy 3.14x.”
Chart 3. SMC Total Assets and Total Debt
C. Negative Investor Sentiment
The debt overhang has precipitated a sell down by institutional investors and
shareholders, resulting in low share prices that bottomed to P56 in 2014, a continuous
downslide from the high of about P180 in early 2011 (Chart 4. Five-Year SMC Stock
Prices).
PLM DBA 721-Strategic Issues Claro G. Ganac
While share prices has improved to P75 to 78 per share, over-all investor valuations
have remained low considering the improvement in net earnings and EBITDA in 2013,
thus showing lingering concerns about SMC’s management. Price-earnings ratio (PER)
is below P5.00 per share. (PER is the amount paid by investors per P1 of net earnings
made by a listed corporation.)
Chart 4. Five-Year SMC Stock Prices (2010 – 2014)
Comparatively, the two large and diversified conglomerates against which it is ranged –
Ayala Corporation and Metro Pacific – have much better valuations than SMC. Both
Ayala and MPI are engaged in related businesses such as infrastructure (water
distribution, tollways, oil refining) that SMC is currently in.
Ayala has a PER of P25.23 and Metro Pacific has a PER of almost P16.00, versus the
P4.88 of SMC. It is also currently trading at less than Book Value per Share of P0.78
compared to the P2.71 and P1.24 of Ayala and Metro Pacific, respectively. In other
words, SMC is considered an inferior stock in the perception of investors, very
likely due to the anxieties over its debt load and management consideration of enterprise
risks.
Chart 5. Comparative Investor Valuations: SMC vs. Peer Companies
Earnings Per
Share Price Earnings
Ratio Price to Book
Ayala Corporation 26.9473 25.2344 2.7053
Metro Pacific 0.3057 15.9961 1.2382
San Miguel Corporation 15.7950 4.8750 0.7760
PLM DBA 721-Strategic Issues Claro G. Ganac
D. Inter-locking Ownership between SMC and its Subsidiary Top Frontier
Investments
In 2012, SMC formed a subsidiary which it used to acquire the 25% stake held by the
Government that corresponded with the previously sequestered Coconut Industry
Investment Fund SMC shareholdings.
In other words, SMC’s Management used the Company’s own money to buy back its
own shares through this subsidiary, and Management retains control of both the parent
company and the successor company This represented a cross ownership between San
Miguel as Top Frontier Investments Holdings, Inc. the parent of SMC by virtue of this
transaction. The Company shelled out close to P58 billion to close the transaction. .
Some legal scholars term this as an “incestuous” legal relationship.
Exacerbating the issue of the buy-back and cross-ownership is that the move made
SMC’s stock illiquid. Its public float is just about 12 – 14 percent. As a result, SMC is
the only top Philippine corporation that is not included in the Philippine Stock
Exchange composite index.
To address this issue, Management converted SMC’s 49% stake in Top Frontier to
property dividends for SMC shareholders. The total 240,196,000 common shares were
given out at the beginning of 2014 to SMC shareholders who received one Top Frontier
common share for every ten SMC common shares.
It was rationalized (See 2013 SMC Annual Report) that the property dividends provided
SMC shareholders an opportunity to benefit from owning Top Frontier shares. Apart from
investment in SMC, Top Frontier is reported to also own gold, nickel and copper mining
assets that have considerable potential for development.
E. Unanticipated Major Risks and Uncertainties
SMC Management’s overly aggressive expansion and its miscalculation of the full
impact of dependence on external borrowings in its investment program has put into
serious question its prudence in the treatment of enterprise risks. It has relied on two key
capital raising activities that had not materialized:
a. The Initial Public Offering of San Miguel Global Power Inc. which was supposed to
have listed primary shares and to have raised substantial amount that would have
added to the cash reserves of SMC.
b. The failed listing of San Miguel Brewery Inc. After spinning off its brewing assets into
this subsidiary, it sold 49% of the shares to Kirin Brewery of Japan which enabled it
to generate investment gains that were booked into cash reserves. But even if it had
listed its shares in the PSE, the offering failed to take shape because of SMC’s
PLM DBA 721-Strategic Issues Claro G. Ganac
reluctance to offer a significant percentage as float to the general public.
Consequently, the PSE ordered the delisting of the stock.
Both of these ill-fated attempts tarnished the image of SMC and its management,
and seemed to shore up perceptions that it has gone into high-finance just to
continue with its ambitious expansion program. At one time the media reported that
President Ramon Ang planned to sell 1 billion SMC shares back in December 2012.
The deal worth about $3 billion would not have been possible because that number
is way in excess of SMC’s outstanding shares. These sudden and rash media
announcements, of course, do not contribute to the credibility of SMC’s Top
Management.
In addition, SMC’s Management again did not foresee the credit tightening of the
BSP and the downslide in the Philippine stock market in 2011 to 2012, which forced
its hand to resort to high interest-bearing debt to finance its speculative PPP bids
and acquisitions and start-up investments.
It undertook dollar-denominated bond offering of as much as $1.5 billion at the time
when the US eased up on its quantitative easing program as the US economy
started to pick up in 2012. This resulted in the appreciation of the US dollar, which
jacked up in turn the interest cost of the dollar-denominated borrowings.
Consequently, it had to book P16 billion in forex losses.
IV. Evaluation of SMC Diversification Using the Resource-Based View of Growth
A. Penrose’s Theory of Growth of the Firm
Edith Penrose (The Theory of the Growth of the Firm,1959) was one of the early scholars
who espoused the Resource-Based Theory in firm behavior and strategic management. She
argued that a business organization will seek to achieve the full potential from all its
resources. Penrose’s view was that firms possess excess resources, which can be used for
diversification purposes, and which then can fuel growth.
Firms grow as long as there are unused resources, diversifying when they can no longer grow
with existing products, services and markets. Growth continues until it is halted.
Changes can free the limit, and growth continues until the next limiting factor appears.
She has been credited by several authors as antedating and developing the seminal ideas on
the resource-based view theory of the firm (Alan M. Rugman and Alain Verbeke, “Edith
Penrose’s Contribution To The Resource-Based View Of Strategic Management”, Strategic
Management Journal, pp 769-780, 2002).
PLM DBA 721-Strategic Issues Claro G. Ganac
Her main intellectual contribution to strategic management theory is that the firm may be
viewed as a collection of fungible resources and, second, that an optimal pattern of firm
expansion may exist, which requires a balanced use of internal and external resources in a
particular sequence (Penrose 1959). She also believed that the optimal growth of the firm
involves a ‘balance between exploitation of existing resources and development of new
ones.’
The resource-based view sees that the competitive advantage of a firm lies primarily in the
application of a bundle of valuable tangible or intangible resources at the firm's disposal
(Penrose, 1959). To transform a short-run competitive advantage into a sustained competitive
advantage requires that these resources are heterogeneous in nature and not perfectly
mobile, meaning that the resources that the firm controls are not imitable nor substitutable
without great effort. If these conditions hold, the bundle of resources can sustain the firm's
above average returns.
The resource-based view approach to strategic management consists of the following four
characteristics:
1. The resource must be valuable if the resource-based approach is to achieve sustained,
above-normal returns, as compared to rivals. Even when a particular strategy appears
optimal for an organization, serious consideration must be given to where the money to
finance the strategy is going to come from, and what its costs are.
2. A set of resources, not equally available to all firms, and their combination into
competences and capabilities, are a precondition for sustained superior returns. Some of
the resources can be property rights, which are exogeneously granted by an outside
authority (such as government concessions), information asymmetry.
3. Competences and capabilities lead to sustained superior returns, to the extent that they
are firm specific (i.e., imperfectly mobile), valuable to customers, non-substitutable and
difficult to imitate. Capabilities are endogenous to the firm, and are built through time. This
can also include distribution channels, supply chains, knowledge and technologies and
brands with high consumer equity.
4. From a dynamic perspective, innovations, especially in terms of new resource
combinations, can substantially contribute to sustainable superior returns.
These four parameters will be used as a framework whether SMC had implemented its
value-creating strategy of diversification effectively.
B. SMC Acquisitions Validation Using the Resource-Based View Framework
SMC’s initial foray into expansion in the 1990s after it divested itself of its holdings in Nestle
and Coca-Cola had been in Purefoods, a processed meats manufacturer. Based on the
resource-based view analysis, the acquisition is value-creating in all four aspects of the
PLM DBA 721-Strategic Issues Claro G. Ganac
proposed framework. This acquisition has resulted in SMC’s undisputed position in the food
business with market-leading brand names in its portfolio.
Purefoods is allied to SMC’s meats and chicken business, and the expansion into an iconic
processed meats brand creates synergy not only in terms of marketing and sourcing, but also
across SMC’s supply chain and distribution management. In addition, SMC executives and
staff are very knowledgeable in the food manufacturing and has linkages with its commercial
feeds business.
SMC’s subsequent entry and investment into non-core businesses are, on the other hand, a
different matter and requires a more thorough analysis and assessment. Below is this
resource-based view strategic analysis in its new business.
Diversification Field Resource-Based Parameter Comment (Positive/Negative)
Oil refining and fuels Financial acquisition + Investment came from internal
funds; fully operational
Resources not available to all
competitors, unique
+ Oil refining technology is a highly
specialized resource; largest
marketing network
Competencies
+ Petron employees are career
oriented with knowhow/skills;
effective back-end and front-end
supply chain
Innovations + Continuous investments in facilities
upgrading
Power generating Financial acquisition
+ Investment came from internal
funds when SMC was still cash
positive; fully operational
Resources not available to all
competitors, unique
+ Sual power plant was acquired
from Mirant, a highly established
international power company; San
Roque plant also operational
Competencies
+ Mirant’s technology and staff
operational expertise are superior;
can be used in new Davao and
Bataan power plants
Innovations + Clean coal energy technology
reported to be used in new plants
Infrastructure and
Tollway Operation
and Management
Financial acquisition
- Large upfront financial outlays
made for PPP projects; funds
sourcing is mixed internal and debt;
Citra, however, is a going concern,
but contribution now not large
enough to cover the new investment
outlays
PLM DBA 721-Strategic Issues Claro G. Ganac
Resources not available to all
competitors, unique, non-
substitutable
+ SMC Management appears to
have connections with government
(unique), with information asymmetry
Competencies
- Tollway construction and operation
and management are not strengths
of SMC; the greenfield infrastructure
projects are to be implemented from
scratch; design capability not clear
Innovations
- Unclear effort at innovation
because of lack of firm-specific
competencies.
Mining Financial acquisition - SMC only has minority stakes in
Indophil; mining is highly speculative
Resources not available to all
competitors, unique, non-
substitutable
- Tampakan project is potentially
world’s largest gold mine; but now
non-operational now because of
legal and stakeholder issues; Nonoc
island nickel mining project remains
problematic
Competencies
- SMC has no experience in mining,
nor does it have access to
associates with expertise and
experience in this field.
Innovations
- Unclear inputs that SMC could give
to proponents; Tampakan uses
open-pit mining which has high
environmental impact
Airline Financial acquisition
- High acquisition cost; hindsight
showed negative gain from the
investment upon divestment
Resources not available to all
competitors, unique, non-
substitutable
Mixed - PAL management and
operating staff remains in the
company; but downsizing program
implemented was highly contentious
and there is high probability of
financial liabilities; SMC’s
connections with the government
had enabled it to open landing rights
to destinations in Europe
Competencies
- SMC people has no competence in
the airline business; operational
systems, management structures
and human resource systems are
entirely different; airline is highly
competitive
Innovations
+ SMC instituted fleet modernization
program and secured air rights to
some markets; but making the airline
PLM DBA 721-Strategic Issues Claro G. Ganac
profitable may take more doing in
this highly competitive industry.
PLM DBA 721-Strategic Issues Claro G. Ganac
V. Conclusions
Based on the foregoing analysis, the following may be concluded:
a. SMC’s reputation and image has been hurt by the ambitious and somewhat speculative
diversification into non-related businesses, and by the apparent lack of caution and due
diligence in the overpriced bids it made on the high-profile infrastructure projects.
b. This has extended to and is validated by the negative investor sentiment for the stock and
the below-average price valuations for its shares. This poor investor appetite will affect
any fund-raising activity it may embark on that is related to equity investments by the
investing public.
c. SMC’s financial condition has been significantly affected by its ambitious diversification;
there appears to be a lack of basic financial management concepts, with poor matching
of revenue streams and interest amortizations on large-scale loans. There was also non-
matching of the loan tenor and the long-term nature and gestation of infrastructure
projects.
d. SMC, based on the resource-based framework, has invested correctly in the oil and fuels
business and in the power generating business. Even on a cursory scale, the investments
appear to be paying off, with reported annual improvements in revenues and profits a year
or two after the investment. These two operating ventures are value-creating investments
and have added to the competitive advantage of SMC as a conglomerate.
e. There is however some negativity in its investment into infrastructure construction and
concessions because of the high acquisition cost for the project, even if Management has
parlayed its advantages in political connections and information asymmetry to winning the
PPP bids.
f. The investment in the airline business and mining appear to be ill-advised.