CASE STUDY: PRIVATIZATION OF MALAYSIA AIRLINES

BY

CHUAN YAP WAI

Graduation Project Submitted to the Department of Business Studies,

HELP University, in Partial Fulfillment of the Requirements for the

Degree of Bachelor of Business (Finance) (Hons)

APRIL 2015

i

DECLARATION

I hereby declare that the graduation project is based on my original work except for

quotations and citations which have been duly acknowledged. I also declare that it has

not been previously or concurrently submitted for any other course/ degree at HELP

University or other institutions. The word count is 10,097 words.

(CHUAN YAP WAI)

Date: 13th April 2015

ii

ACKNOWLEDGEMENTS

“Many of life’s failures are people who did not realize how close they were

to success when they gave up” —— Thomas Edison

To my considerate and supportive project supervisor, Dr. Alan Chew: My

deepest gratitude. Without your support, I will not able to complete this study. Thank

you very much.

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CASE STUDY: PRIVATIZATION OF MALAYSIA AIRLINES

By

CHUAN YAP WAI

April 2015

Supervisor: Dr. Alan Chew

Abstract

This is a single case study focuses on the most recent privatization case in

Malaysia as at 2014, the privatization of Malaysian Airline System Berhad (Malaysia

Airlines) under selective capital reduction and repayment route, in order to provides a

fundamental knowledge and concept regarding the privatization transaction activity

conducted in Malaysia.

Malaysia Airlines, as a premium national carrier tied with national pride, is not

profitable since 2001 because facing an intense competition with local low-cost air

carrier, AirAsia, Yet, the two major disasters – the missing of flight MH370 and flight

MH17 within only four months threaten Malaysia Airlines’ survival. A long term losses

and two major disasters force Malaysia Airlines leave from Kuala Lumpur stock

exchange and being privatized by Malaysian sovereign wealth fund, Khazanah Nasional

Berhad.

Recovery plan has been carried out. There are possibility for Malaysia Airline to

be recovered through minimizing the transaction cost by utilized the available assets

efficiency and effectively. Yet, reposition and rebrand is necessary to create a new

added value to the market. However, there are potential threats for Malaysia Airline to

deal with including the trade-off of cost and service quality, transaction cost of agency

problems, and targeted governmental regulations or antitrust litigation. Future of

Malaysia Airline is still has many uncertainties.

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TABLE OF CONTENTS

Declaration of Originality and word count i

Acknowledgement ii

Abstract iii

Table of Contents iv

List of Figures vii

List of Tables viii

List of Abbreviations ix

Chapter 1 Introduction

1.1 What is privatization?

1.1.1 Management Buy-Out (MBO) 1

1.1.2 Management Buy-In (MBI) 2

1.1.3 Leveraged Buy-Out (LBO) 2

1.2 Why listed companies go private?

1.2.1 Trends of Privatization in Malaysia 3

1.2.2 Reasons for Listed Companies Go Private 3

1.3 How listed companies go private?

1.3.1 Law & Regulations of Privatization 5

1.3.2 Routes of Privatization 5

1.4 Purpose and Significance of the Study 9

1.5 Objective of the Study 9

1.6 Limitation of the Study 10

1.7 Organization of the Study 10

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Chapter 2 Literature Review

2.1 The Reasons for Listed Companies Go Private 11

2.1.1 Agency Problems 12

2.1.2 Free Cash-Flow 13

2.1.3 Wealth Transformation 14

2.1.4 Undervaluation 15

2.1.5 Takeover Defense 16

2.2 Malaysian Case Review

2.2.1 Maxis Communications Berhad 17

2.2.2 Mamee-Double Decker (M) Berhad 19

2.2.3 John Master Industries Berhad 20

2.3 Critical Success Factor for Privatization 21

Chapter 3 Methodology

3.1 The Purpose of the Study 23

3.2 The Design of the Study

3.2.1 Qualitative Research Method 24

3.2.2 The Types of Qualitative Research: Case Study 25

3.2.3 Case Selection 25

3.3 Data Collection 26

Chapter 4 Findings & Analysis

4.1 Background 27

4.2 Share Price Reaction of Malaysia Airlines to the Disasters 28

4.3 Exit Options for Malaysian Airlines 33

4.4 Potential Opportunities of the rebranded Malaysian Airlines 35

4.5 Potential Threats of the rebranded Malaysian Airlines 38

vi

Chapter 5 Conclusion

5.1 Future of Malaysia Airlines 40

5.2 Limitation of the Study & Recommendation for Future Research 42

References 44

Appendices 50

vii

LIST OF FIGURES

Figure 4.1 6-month trend of Malaysia Airline securities as of 12 August 2014

Figure 4.2 1-year trends of Malaysian Airline securities as of 12 August 2014

Figure 4.3 2-year trends of Malaysian Airline securities as of 12 August 2014

Figure 4.4 3-year trends of Malaysian Airline securities as of 12 August 2014

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LIST OF TABLE

Table 1.1 The average premium paid of the successful privatization cases in 2012

Table 4.1 The closing share prices and trading volume of Malaysia Airline between

20th

February to 21st March 2014.

Table 4.2 The closing share prices and trading volume of Malaysia Airline between

30th

June to 1st August 2014

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LIST OF ABBREVIATIONS

ASEAN Association of Southeast Asian Nations

CMBOR Center of Management Buyout Research

CMSA Capital Market & Services Act 2007

EMH Efficient Market Hypothesis

IPO Initial Public Offering

LBO Leveraged Buy-out

M&A Merger and Acquisitions

MASEU Malaysian Airline Systems Employees Union

MBI Management Buy-in

MBO Management Buy-out

MRO Aircraft Maintenance, Repair, and Overhaul

MSA Malaysia-Singapore Airlines

PwC PricewaterhouseCoopers

SCR Selective Capital Reduction & Repayment

VWAP Volume Weighted Average Price

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CHAPTER 1

INTRODUCTION

1.1 What is privatization?

Privatization can be defined as the transferring ownership of assets or shares

from a government to privately owned entities. It also can be meant the transition from

a public listed company (named Berhad/ “Bhd” in Malaysia) to a private company

(Sendirian Berhad/ “Sdn Bhd”).

However, the term ‘privatization’ in this study is meant the transition from a

public listed company to a private company, same meaning with the terms ‘going

private transaction’, ‘public-to-private transaction’, ‘buy-out’, or ‘takeover’ that found

in other studies. Its meaning includes the alteration in the ownership structure of a

public listed company, and the removal of a company’s official list from the stock

exchange of Malaysia (Bursa Malaysia). Privatization transactions are a special form of

a buy-out. There are several types of buy-outs, the most common are management buy-

out, management buy-in, and leveraged buy-out.

1.1.1 Management Buy-Out (MBO)

When a company is acquired by the management team of the company and

mostly backed by private equity investors, this buy-out is called management buyout

(Renneboog and Simons, 2005). The major motive encourages the management team to

buy the company is due to information asymmetry. The internal management team is

more familiar with the company than outsiders; as such, they are more capable to

determine the actual value of the company. They would be benefited in acquiring a

controlling stake in the company when the company is undervalued.

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1.1.2 Management Buy-In (MBI)

A buy-out is called management buy-in when a company is acquired by outside

management team. Management buy-in transactions are always considered as a hostile

transaction (Robbie and Wright, 1995). The outside management may interested in

buying the company because they realize the company can be performed better than

current when fully utilizing its potential corporate value.

1.1.3 Leveraged Buy-Out (LBO)

Generally, almost all the privatization transactions reviewed in other studies are

financed by borrowing, which is the reason why privatization transactions are often

considered as leveraged buyout transaction. According to a study of Center of

Management Buyout Research (CMBOR), privatization transactions are usually

leveraged at around 53% of the acquisition value. As such, a management buyout is

called leveraged buyout when this is the case. Hence, leveraged buyout transaction

usually is built around some principles:

(i) There is high leveraged financial structure;

(ii) There are remuneration packages on a pay-for-performance basis for the

managers;

(iii) There is equity ownership for management and directors, and contractual

relationship with owners and creditors this may constrain the waste of

free cash flow. (Jensen, 1989)

In Malaysia, however, management buyout and management buy-in transactions

are a rare case as 70% of Malaysian companies are family-owned (Noor Afza Amran

and Ayoib Che Ahmad, 2011). The majority shareholders of the companies normally

are the founders and their family members. Therefore, leveraged buyout transaction is

the most popular type of privatization transaction in Malaysia.

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1.2 Why listed companies go private?

1.2.1 The Trends of Privatization in Malaysia

Private companies go public is a common practice in Malaysia. According to

The Edge Malaysia, Bursa Malaysia had raised RM23.2 billion through initial public

offering (IPO) in 2012, which is the fifth highest amount of capital in the world.

Although the amount was reduced by 65% at RM8.24 billion in 2013, but it was still the

highest fund raised among ASEAN countries (Bursa Malaysia Annual Report, 2013).

However, public listed companies go private have just increased in recent years. In the

first half of the year 2007, RM46.29 billion has already been wiped out from Bursa

Malaysia’s market capitalization as 17 companies were taken private (The New Straits

Times - Business Times, 20 June 2007). OSK Research Sdn Bhd head of research Chris

Eng comments that the wind of privatization was expected stronger in 2008 in view of

the low valuation of stocks, even if earnings may contract and the price-to-earnings

ratio is still low. (The Edge Financial Daily, 31 December 2008)

1.2.2 The Reasons for Listed Companies Go Private

Although there are numerous advantages for a company goes public, such as

diversifies ownership, strengthens company’s capital base, increase shareholders’

liquidity, facilitates acquisitions, and increases prestige. However, there is cost incurred

to maintain listing status. They are imposed more restrictions on management and on

trading. They have to fulfill the securities law requirements such as maintaining post-

listing performance, issuing annual report, and holding annual general meeting. These

make the companies less liberty and difficult to make major decisions such as obtaining

new shareholders, acquiring new businesses, or expanding to overseas without losing

precious time in fulfilling such requirements. Therefore, by going private, they can free

up time and money to focus on long-term outlooks and actions without being

constrained by the need to consider how a proposed decision might influence company

earnings or the volatility of the share price.

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Kenanga Investment Bank Bhd head of corporate finance Debbie Leong had

agreed that one of the factors make public listed companies go private is the cost of

maintaining the listing status. Other than that, there are factors were not benefiting from

having listing status, such as low analyst coverage and companies were too small to

attract institutional shareholders. Eventually, companies unable to tap the capital market

for funds due to lack of visibility to investors. (The Edge Financial Daily, 31 December

2008)

Privatization exercise also encouraged by external factors such as interest rate.

In the process of LBO, funding is the key factor affecting the success of a privatization.

An example of this issue for leverage buyout is AirAsia. The plan of AirAsia go private

had been aborted in 2008 due to global financial crisis as AirAsia’s major shareholder;

Tune Air was unable to raise capital. Senior Executive Director of

PricewaterhouseCoopers (PwC), Tan Siow Ming said that when the global credit

situation has eased, private equity firms are the alternative sources of financing for

privatization as they have adequate investible capital, or they are able to leverage at

reasonable cost in a given of credit crunch, or a particular buy-out is fit their investment

strategy. (The New Straits Times - Business Times, 24 October 2009)

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1.3 How Listed Companies Go Private?

1.3.1 Laws & Regulations of Privatization

Privatization is one of the merger and acquisitions (M&A) activities. The laws

and regulations governing merger and acquisitions activities in Malaysia include the

Companies Act 1965, the Capital Market & Services Act 2007 (Act 671) (CMSA), the

Guidelines provided for the Acquisition of Assets, the Malaysian Code on Take-Overs

and Mergers 2010 (Takeover Code), Mergers and Takeovers issued by the Foreign

Investment Committee (FIC Guidelines), and the Listing Requirements of the Bursa

Malaysia for public listed companies. These laws and regulations are used to protect

the interest of shareholders by ensure shareholders involved in merger and acquisitions

transaction receive a fair and equal treatment, and to ensure that all of the merger and

acquisitions transactions are take place in a completive, informed, and efficient market.

1.3.2 The Routes of Privatization

There are three routes for public listed companies to go private, which are:

(i) Takeover Offer;

(ii) Selective Capital Reduction & Repayment; and

(iii) Disposal of Assets.

According to the e-newsletter from Crowe Horwath Malaysia, an accounting

company, the most common route of privatization is takeover offer based on year 2011

and 2012. There are total of 9 and 11 transactions in year 2011 and 2012 respectively.

This is because public listed companies go private via takeover route is relatively

straight forward and do not involve many complicated procedures.

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(i) Takeover Offer

Public listed companies in Bursa Malaysia can be privatized through takeover

offer route. This transaction exercise must be complied with the requirements set up by

the Securities Commission, and embodied under the Takeover Code.

The takeover offers could be made by any party, such as the existing controlling

shareholders, or the party who is aligned to the controlling shareholders. This type of

offer is considered as friendly takeover. If the offer is made by a party who is not

aligned to the controlling shareholder, or who is not invited by the board of directors.

This type of offer is considered as hostile takeover.

Takeover offer can be mandatory or voluntary in Malaysia. According to

Takeover Code, the mandatory offer trigger is 33% where:

(a) the acquirer has obtained control in a company; or

(b) the acquirer has acquired more than 2% of the voting shares or voting rights

of a company in any period of six (6) months and that acquirer’s holding was

more than 33% but not more than 50% of the voting shares or voting rights

of the company during that six (6) months period,

Once the level of acceptance has reached over 50%, a mandatory offer becomes

unconditional. Acquirers will only exposure in a condition for a takeover in a voluntary

takeover scheme, whereby it must have at least 50% of shareholding. When the level of

acceptance has reached 75%, shareholders of the target company can ensure special

resolutions are passed. However, if the level of acceptance breaches over 75%, the

target company could be suspended or delisted because the minimum public

shareholding spread (at least 25%) for listed companies may not be satisfied (Listing

Requirement of Bursa Malaysia).

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(ii) Selective Capital Reduction & Repayment (SCR)

Selective capital reduction and repayment is a process of reducing a company’s

issued share capital through share cancellation and repurchases. Under selective capital

reduction and repayment route, the major shareholder offers a reasonable price to

minority shareholders to buy back their shares and take the listed company private

comply with Section 64 (1) of the Companies Act 1965. Once this exercise successfully

to be done, the major shareholder is owns 100% of the capital of the company, and the

company is delisted from the stock exchange.

The interest of the creditors and members will be affected under selective capital

reduction and repayment route. Therefore, selective capital reduction and repayment

exercise would require approval from the creditors and members of the privatized

company to reduce its issued share capital. This is to ensuring that there is enough

capital left in the privatized company to satisfy its debts first, and then the balanced can

only be returned to its members after a sanction by the Court and the passing of a

special resolution (Abdul Wahab, 2008).

This is the drawback of selective capital reduction and repayment route as

compared to the takeover route because it may take times to get the approval from

creditors, members and the Court. The privatized company may also need to

recapitalize if the reduced capital is not enough for the daily operation of the company.

Generally, selective capital reduction and repayment is undertaken by those companies

which are undervalued, and have substantial capital to make payment to other

shareholders (Onn, 2012).

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(iii) Disposal of Assets

There is not a privatization exercise for selling of entire of business and

returning the proceeds to shareholders. However, a proposal of disposal assets via

tender exercise can only be considered as privatization.

Taking a case as example, John Master Industries Berhad (John Master

Industries) was announced to dispose the entire business and undertakings via tender

exercise on 23 June 2009. This is due to uncertain outlook of company’s future

financial performance, as well as the increasing of competition in the industry. The

board of director felt that the company may unable to declare dividend in the future

given the unfavorable situation above. Therefore, a tender was undertaken and anyone,

including the major shareholder in the company, can bid for the business in whole, or in

part.

Eventually, the major shareholder of John Master Industries, Yoon Fong

Garments Sdn Bhd was made a highest bid for RM77.4 million, and successfully buys

the entire business after a negotiation with the independent director and agreed to

increase their offer price by RM1.1 million. John Master Industries then embarked on

capital repayment exercise to repay all the proceeds from the disposal of the assets after

getting approval from minority shareholders. This is an indirect privatization exercise

for John Master. (Onn, 2012)

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1.4 Purpose and Significance of the Study

There have numerous studies focused on the topic of go public transaction or

other types of mergers and acquisitions, such as the privatization of government-own

companies. However, there is a few number of studies concern the privatization of

public listed companies, especially for Malaysia.

The privatization of public listed companies in Malaysia is increasing sharply in

recent years, as part of companies’ restructuring and/ or merger and acquisition

activities. Therefore, this study is going to analysis the cases of privatization in

Malaysia, the latest hot topic - The Privatization of Malaysian Airline System Berhad,

in order to fill the gap to existing literature, and provide foundation knowledge about

privatization exercise in Malaysia.

1.5 Objective of the Study

The intention of this study is to determine the following problem statements by

using case studies:

i. The routes for public listed companies to be taken private;

ii. The regulatory framework for different routes of privatization exercise;

iii. The reasons for public listed companies being taken private ;

iv. The critical success factor that affecting the implementation of privatization;

v. Examine the privatization of Malaysian Airline System Bhd (Malaysia

Airlines):

Why Malaysia Airline go private?

What are the potential opportunities for rebranded Malaysia Airlines?

What are the potential threats for rebranded Malaysia Airlines?

What is the possible future for rebranded Malaysia Airlines?

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1.6 Limitation of the Study

This is a case study to examine the privatization of Malaysia Airlines in 2014,

provides a big picture and basic concept about privatization transaction. The data in this

study included a lot of news and personal opinion which might have bias that affected

by personal feeling, experience, and limitation of knowledge.

The scope of this study is limited to single case study which is just happened on

last year, 2014. A single case study contains not enough information and cases that

including all difference routes of privatization transaction to strongly support the

analysis of this study. This is because privatization transaction is a relatively new

phenomenon in Malaysia, as well as due to time limitation.

Timeframe of this study is not more than a year. This is relatively short period of

study compared to those studies with the same topic in others developed countries, such

as United Kingdom and United States.

1.7 Organization of the Study

This study is divided into six (5) chapters. Chapter one (1) of this study

introduces the rationale of doing this research. The background of the study, purpose

and significance, objective, and scope of the study are included in this chapter. Chapter

three (2) is literature review, which provide the reasons to explain why public listed

companies go private and the critical factor that affecting the success or failure of

privatization transaction. The design of the study, case selection, and data collection

method is included in chapter four (3). Chapter five (4) is the finding result and

analysis. The case study of privatization of Malaysia Airlines will be concluded in

chapter six (6).

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CHAPTER 2

LITERATURE REVIEW

This chapter is to provide a theoretical basic to this study. The reasons for public

listed companies to go private, Malaysian case review, and the success critical factor for

privatization will be discussed in this chapter. Information regarding the reasons for

public listed companies to go private is supported by academic researches which are

mostly gathered from United Kingdom, United State, and European Countries. While

there are also examples from Malaysia to examine the reason those companies go

private and the critical factors affecting the process of privatization.

2.1 Reasons for Listed Companies Go Private

In reality, the decision of minority shareholders is the key factor to affect the

process of privatization whether it will be taken private successful or failure. Generally,

the acquirer will offer a price that higher than market price to the shareholders of the

target company, in order to convince the shareholder sell the shares of the target

company to the acquirer. There were 117 of privatization cases happened in England

between 1997 and 2003, the shareholders of target companies was obtained an average

40% share premium (Renneboog et al., 2005).

This means that the benefits gained by acquirers must be valuable than the share

premium they offering to shareholders. What are the advantages of privatization has

attracted acquirers willing to offer a higher price to buy the shares of target companies?

There are various studies had answered the previous question as below:

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2.1.1 Agency Problem

The study of Berle and Means (1932) had indicated the consequences of

ownership and control being separate. The separation of ownership and control causes a

company incurs agency cost because managers (agent) do not have a feeling of

belonging to the company. Therefore, they will not always perform in the interest of

shareholders (principal). This is the agency problem that every public listed company

may encounter.

Jensen & Meckling (1976) had further explained the relationship between

managerial behavior, agency costs, and ownership structure. Managers are likely to use

company’s resources inefficiently. They found that one of the way to reduce agency

cost is making managers become residual claimants who will receive the profit of

company after all prior obligations have been paid, managers will think of the marginal

revenue and marginal cost carefully in order to get the maximum marginal profit.

Hence, privatization, to a certain extent, can solve the agency problem because the

acquirer (might be the founder of the company) regain right of control of the company,

thereby, combine the ownership and control of the company.

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2.1.2 Free Cash-Flow

Scholars had also indicated that privatization can reduce free cash flow in a

company, thereby, reduce agency cost. Jensen (1989 & 1997) found that managers tend

to accumulate and control over the free cash flow because they can increase dividends

or repurchase shares. As such, pay out current cash would likely be invested in low-

return projects or wasted. If most of activities of company are financed by debt, free

cash flow must use to pay off debt. Therefore, an appropriate debt ratio allows a

company to invest optimally, limits managers’ ability to use company resources in ways

that do not benefit shareholders (Jensen 1986 & Stulz 1990). Yet, there is a threat of

takeover if the debt ratio over an optimal level. This company will have a large

bankruptcy risk if managers do not work efficiently and run the company effectively.

Competitors or shareholders may take a controlling interest and bring in new managers

when share price of the company keeps deteriorating (Lowenstein, 1985).

Free-rider problem is very common in public listed companies. Shareholders

enjoy the benefits such as capital gains and dividends from a public listed company.

However, they do not want to contribute and expect others to monitor the performance

of the management. Eventually, agency problem is getting worse because no one person

willing to oversee the management. Hence, free-rider problem can be solved through

privatization by excluding those non-contributors (Shleifer & Vishny, 1986).

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2.1.3 Wealth Transformation

One of the benefits of privatization is transferring the wealth from stakeholders

such as bondholders, preferred shareholders, employees, and government, to

shareholders. Lowenstein (1985) realized that there is a tax deduction through interest

on loan through public to private transaction which is an important source of wealth.

While Shleifer and Summers (1988) conjectured that privatization constitute a transfer

of wealth from employees to shareholders. This occurs because acquirers do not honour

implicit contracts with employees regarding wages and benefits. In acquirers’ view, the

abrogation of these commitments enables them to use the deal as a mechanism for

enhancing the profitability of the company, thereby, enhancing the shareholders’

wealth, at the expense of employees.

There are many studies focus on the wealth transfer effect on bondholders and

preferred shareholders in a going-private transaction. Renneboog and Simons (2005)

found that there are three main mechanisms through which a company can transfer

wealth from bondholders to shareholders: (i) by an unexpected increase in the risk of

investments projects; (ii) by large increase in dividend payments; (iii) by an unexpected

issue of debt of higher or equal seniority. All of these mechanisms can effectuate wealth

expropriation of specific stakeholders. Especially the third mechanism, it can lead to

substantial bondholder wealth expropriation in a going-private transaction.

This is because acquirers will issue large amount of new bonds in the process of

leveraged buyout, insolvency risk of acquirers become higher. Bondholders will need to

bear higher risk, and the market price of bond will decrease. Hence, the gains from

privatization of a public listed company might be partially come from the reduced value

of bonds and preferred shares.

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2.1.4 Undervaluation

Many scholars believe that there could be asymmetric information between the

acquirers or management of company, and outside shareholders regarding the greatest

value that can be realized with the existing assets. Value of a company is not only

depends on its tangible assets, but also take account of its intangible assets, such as

company resources in research and development, brand awareness, and talented

employees. Unfortunately, it is impossible for outsiders to realize the true value of the

company that included intangible assets.

According to the Efficient Market Hypothesis (EMH) that formulated by Eugene

Fama in 1970, there are three types of market efficiency classification, which are: (i)

Strong Efficiency; (ii) Semi-strong Efficiency; and (iii) Weak Efficiency. If there is

asymmetric information, the market must not be strong efficiency. The management of

company who has superior private information will know whether the share price is

undervalued or overvalued in relation to the true value of the company. In management

buyout (MBO) process, Lowenstein (1985) had found that management of company

tends to use accounting and finance techniques to depress the pre-privatization share

price in order to obtain excess return.

Jensen (1989, 1997) had agreed that there is moral hazard exist in the majority

shareholders or management whoever are the acquirer in the process of privatization.

He believed asymmetric information can be eliminated by regulation of disclosure to

govern company reporting. However, even so, value of company also will be

undervalued. This is because:

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(i) Difference Value Preferences

Generally, investors love to receive gains as fast as possible, while

investment advisors (brokers) prefer to engage their client in active

trading in order to increase their commission. Thus, value of those

companies appropriate to hold for long-term will be undervalued.

This causes management of company tends to choose short-term

projects in order to get result faster, thereby, increase analyst coverage

for attracting investors.

(ii) Agency Problem

Managers accumulating free cash-flow and building empire causes

serious waste in company resources, thereby, intrinsic value of

company cannot be realized.

2.1.5 Takeover Defense

Managers develop their unique and competency skills which align with a

company’s business strategy and working culture throughout their career in a same

company. This specific human capital may not create value for another company.

Therefore, in order to avoid being takeover and make everything maintain in status quo,

managers might launch management buyout transaction, or encourage the founder of

company privatize the company.

Lowenstein (1985) found that it is a strategic defence for management against

hostile takeover and protects their job. Jensen and Ruback (1983) further explained that

when managers have a very important position in company, managers may have

preference for keeping company independent to secure their position. This phenomenon

can be confirmed in the empirical research on management buyout transactions by

Michel and Shaked (1986).

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2.2 Malaysian Case review

2.2.1 Maxis Communications Berhad (via Takeover Offer)

Maxis Communications Bhd (Maxis) was Malaysia’s biggest mobile operator

which established in 1993, provides voice and data telecommunications service in

Malaysia. The company also owns mobile operators Aircel in India, and Natrindo

Telepon Selular in Indonesia. In 2006, Maxis posted a net profit of RM2.1 billion.

However, it was being privatized by Binariang GSM Sdn Bhd (Binariang) in 2007 at

offer price of RM15.60 per share, which is 20% premium of the most recent closing

price RM13, costs a total of RM15.8 billion. It was a hot topic in Malaysia because the

trend of privatization of public listed companies was just started in the beginning of

2007, and the privatization of Maxis was wiped out nearly RM40 billion from Bursa

Malaysia.

As mentioned in previous, the most common reason for a public listed company

go private is when the owner(s) of company believe that the share price of company is

undervalued, company was proposed to go private in order to bring the share price back

to the company’s intrinsic value. However, in the case of Maxis, the company was

being taken private because of the company future business expansion plan is differ

from the investors, who are risk averse may prefer conservative and stable plan, in order

to receive a stable and high dividend income (The Star Online – 26th June 2008).

According to an article in Bloomberg with title ‘Maxis Share Jump 18% to

Record on Takeover Offer (Update 3)’, privatization of Maxis eases the strategic

options in Maxis’s expansion strategy in Indonesia and India because there is more

elaborate and time-consuming in disclosure and approval process when staying as

public listed status. Raja Arshad Raja Tun Uda, Binariang chairman said that, being a

private company allows Maxis to raise debt easily and increase spending to expand

overseas markets without hurting public shareholders (Bloomberg – 4th May 2007).

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Maxis was being privatized through conditional takeover offer route (also

known as ‘general offer’) because this route is easier than selective capital reduction

and repayment (SCR) route, which is more tedious as approval from court and creditors

are required for the successful implementation of privatization. Generally, SCR route is

undertaken by those companies have substantial cash to buy-out the remaining shares

from minority shareholders without any necessary financing activity. While in the case

of Maxis, Binariang need to raise capital via bank borrowing, as well as bond issuing,

jointly arranged by ABN AMRO Asia Advisers (M) Sdn Bhd and CIMB Investment

Bank (MalaysianWireless – 4th

May 2007). Some similar cases including Bandar Raya

Developments Bhd, YTL Cement Bhd, United Malayan Land Bhd, Bumi Armada Bhd,

and Astro All Asia Network.

According to an article in Malaysian Institute of Accounts, there are mixed

reaction from market against the privatization of Maxis. Some believe that the

privatization of Maxis will affect the Malaysian stock market because the market

capitalization of Maxis is nearly RM40 billion, ranked in sixth position in Bursa

Malaysia, it was expected to wipe out around 4% of the Kuala Lumpur Composite

Index’s market capitalization. However, Tan Sri Nor Mohamed Yakcop, Malaysia’s

Second Finance Minister, said that the privatization of Maxis will not damage local

stock market as privatization of listed company is a common scheme of thing in capital

market.

19

2.2.2 Mamee-Double Decker (M) Berhad (via SCR)

Mamee-Double Decker (M) Bhd (Mamee) is a snacks maker incorporated in

1971, a Malacce-based company led by Chief Executive Officer Pang Tee Chew. was

also the owner of the brands including Mamee Monster, Double Decker, Mister Potato

and Mamee Instant Noodle. Mamee was listed in 1992 and owns 37% shares of the

potato chip market in Malaysia.

In 2011, Mamee was became the spotlight of media due to its privatization

proposal was taking selective capital reduction and repayment (SCR) route under

Section 64 of the Companies Act 1965. This is a rare case in Malaysia on that time

because normally SCR route will only undertook by those companies which have strong

cash flows, low price-to-earnings ratio (PE ratio), and with good track record over the

long term period. Pong Teng Siew, head of research in Jupiter Securities, said that

perhaps one out of hundred companies will use this route rather than making a takeover

offer (The Star Online – 14th April 2011). Mamee was offer a capital repayment offer of

RM4.39 per share, which is 21.9% premium of the last traded price of RM3.60, and

which is the price most of the analysts reckons that there is fair enough.

According to The Star Online, the reasons Mamee went private was Mamee

plans to fork out RM100 million of capital expenditure to upgrade its machinery and

facilities. However, Mamee was facing uncertainties due to high expenditure in selling

and distribution, high raw material costs, as well as the losses in foreign exchange

volatility. Yet, Mamee noticed that its shares were trading in low volume. The daily

average trading volume of Mamee’s shares in 2010 was approximately a mere 0.22% of

its total free float. Hence, this is an opportunity for shareholders to realize their

investment in Mamee at an attractive premium above the historical trading prices.

20

However, the repayment of RM179.8 million or RM4.39 per share to minority

shareholder results a high level of gearing for Mamee. Therefore, Mamee may need to

invite new equity partner to lower down the gearing. According to Bloomberg Business

at 10th

July 2012, Mamee was hired Rothschild for the sale of about 40% shares and

seeking US$100 million. In 7th February 2013, Mamee announced that it has formed

partnership with The Headland Private Equity Fund 6 L.P., a regional Asian private

equity fund advised by Headland Capital Partners Limited.

2.2.3 John Master Industries Berhad (via Disposal of Asset)

John Master Industries Bhd (John Master) was an investment holding company

which engaged in the apparel products and property development business in Malaysia.

As mentioned in Chapter 1 when introducing the routes of privatization, John Master

was announced to dispose the entire business and undertakings via tender exercise on

23 June 2009. This is due to uncertain outlook of company’s future financial

performance, as well as the increasing of competition in the industry. The board of

director felt that the company may unable to declare dividend in the future given the

unfavourable situation above. Therefore, a tender was undertaken and anyone, including

the major shareholder in the company, can bid for the business in whole, or in part.

Eventually, the major shareholder of John Master Industries, Yoon Fong

Garments Sdn Bhd was made a highest bid for RM77.4 million, and successfully buys

the entire business after a negotiation with the independent director and agreed to

increase their offer price by RM1.1 million. John Master Industries then embarked on

capital repayment exercise to repay all the proceeds from the disposal of the assets after

getting approval from minority shareholders. This is an indirect privatization exercise

for John Master.

21

2.3 Critical Success Factor for Privatization

Implementing a privatization exercise is very expensive, especially when it fails

to achieve the objective as the previous effort in preparation by the experts, such as

investment bankers, accountants, and lawyers will be wasted. Hence, the bidders/

acquirers must determine the factors that may affect the process of privatization. There

are some cases to refer:

(i) Ranhill Utilities Behad

In 2011, the offer price of RM0.90 per share or in total of RM259 million in the

takeover proposal of Ranhill Utilities Bhd was at a 28% discount (about one-third

discount) to its net tangible asset per share of RM1.25 as at 31st March 2011.

Independent advisor of minority shareholders were advised the minority shareholders

who was holding the remaining of 41.84% shares to reject this offer. Hence, the offer

price must be reasonable and attractive to ensure the company can be successfully taken

private (The Star Online – 13rd

August 2011).

(ii) M3nergy Berhad

M3nergy Berhad (M3nergy) was tried to take the company go private 2 times

within twenty months. The first time was made in September 2008 by the Melewar

Equities (BVI) Limited (Melewar Equities), the largest shareholder of M3nergy at an

offer price of RM1.20 per share. This was a premium of approximately 49% of the most

recent traded price of RM0.805 per share. Eventually, the privatization bid was failed as

some minority shareholder reckons that the offer was far lower to company’s net

tangible assets per share.

The second time was made in May 2010 by Adamus Avenue Sdn Bhd

(Adamus), a company controlled by the managing director of M3nergy at an offer price

of RM1.85 per share. This second time offer was not accepted by M3nergy’s board.

This is because M3nergy’s financial adviser Hwang DBS Investment Bank Berhad

reckons that the conditional takeover offer from Adamus was not unattractive and not

fair.

22

As such, board of director of the target company and the independent director of

minority shareholders have to take the responsibility to ensure the fairness of the

premium and offer price to the existing shareholders. A report from Crowe Horwath

Malaysia, an accounting company has made a conclusion that the offer price and the

corresponding premium of the offer price is one of the critical factors affecting the

success or failure of a privatization exercise. On the other words, if the offer price

contains a higher premium would have the higher possibility to be successfully

approved by the board, independent director, and minority shareholders.

The table 1.1 shows the average premium paid of the successful privatization

cases in 2012. Majority of cases was paying around 18% to 22% of premium over the

five (5)-day volume weighted average price (VWAP).

Date of

Announcement

Target Company Offer

Price

5-day VWAP

prior to

announcement

Premium

Year 2012 Berhad RM RM RM %

27th

January Glenealy Plantations (M) 7.50 6.43 1.07 16.64

27th

January Golden Frontier 1.50 1.23 0.27 21.95

9th

February Mahajaya 0.85 0.72 0.13 18.06

2nd

March eBWorx 0.90 0.76 0.14 18.42

12th

March Lipo Corporation 1.25 1.04 0.21 20.19

19th

March Rock Chemical Industries (M) 2.10 1.73 0.37 21.39

16th

April TSM Global 1.25 1.22 0.03 2.46

30th

July Bandar Raya Developments 2.90 2.51 0.39 15.54

(Source: Crowe Horwath Malaysia)

23

CHAPTER 3

METHODOLOGY

This chapter is to provide an insight of the way of this study been conducted. In

order to study the phenomenon of privatization in Malaysia, qualitative case study

methodology becomes important. This chapter would help minimizing the variation by

laying out the guidelines for each stage of this study. It is a major way of increasing the

reliability of this study.

3.1 Purpose of the Study

Privatization is one of the common types of company restructuring activities in

Malaysia since 2007. However, there are only a few number of studies focus on this

activity comparing with going public transaction. Therefore, in order to fill the gap to

existing literature, and provide foundation knowledge about privatization exercise in

Malaysia, this study is going to have an in-depth study about privatization transaction

for public listed companies in Malaysia, including how a privatization of a listed

company can be structured, and its regulatory framework.

24

3.2 Design of the Study

3.2.1 Qualitative Research Method

In order to have an in-depth study about privatization transaction for public

listed companies in Malaysia, qualitative research method is the most appropriate

method being adopting in this study. Qualitative research method aims to help

researchers understanding the human behavior or social phenomenon. It provide a

complex textual descriptions through asking the questions of ‘What’, ‘Why’, and ‘How’

on a social phenomenon, rather than using number as data for analysis (Patton, 2007).

However, there are criticisms on this method. The samples in qualitative

research not enough big to represent a huge population, therefore, it is difficult to

generalize a credibility result. Yet, the process of data collection and data analysis in

qualitative research is lack rigor compare with quantitative research. There are many

open-ended questions will be asked in an interview, researches will expect to get more

variety of aspect on a phenomenon through the interviewees’ answers rather than only

‘Yes’ or ‘No’. Researchers even can directly participant or observe a phenomenon in

daily to understand what happened, why it happened, and how it happened. That is why

qualitative research method also being criticized that the findings are biased by

researchers’ own feelings and opinions

Qualitative research is characterized by its aims. The purpose of this study is

providing foundation knowledge about privatization exercise in Malaysia. In the

situation where little is known, qualitative research method is always the better option

to be started in order to solve the qualitative questions as seen in Chapter 1, included

‘What is the routes for listed companies go private?’, ‘What is the regulatory framework

of privatization transaction?’, and also as seen in Chapter 2: ‘Why a public listed

company will being privatized?’.

25

3.2.2 Types of Qualitative Research: Case Study

There are four major types of qualitative research, which is phenomenology,

ethnography, grounded theory, and case study (Baxter and Jack, 2008). The first two

types are more on discovery and description on human behavior and the culture in a

group people or an organization. Grounded theory is used to develop a new theory

based on empirical data. Therefore, in order to find out the critical success and failure

factors on the process of privatization of public listed companies in Malaysia, cases of

privatization transaction in real world will be collected and analyzed in this study.

No matter quantitative research or qualitative research, case study can be used in

both to provide an in-depth study and analysis on a single or a small number of units.

The unit may include an individual, a group of people, or even an organization. Case

study can be very simple or very complex depends on the objective of a study and the

duration of the study. Researchers can only describe and explain a single event or

phenomenon, to be more complex, they can also trace a single event or phenomenon

over a period of time in order to allow the changes and adjustments reflected in the

study.

Due to the limitation of time, single case of privatization transaction in Malaysia

in 2014 will be picked and analyzed in this study. All of the data, such as the news, the

comments from expertise, and previous empirical research regarding the cases will be

collected to assist the analysis work. Data collection will be explained in details in next

section.

3.2.3 Case Selection

Single privatization cases in Malaysia, which is the privatization of Malaysian

Airline System Berhad just happened on last year 2014, will be examined to provide a

big picture and basic concept regarding the privatization process.

26

3.3 Data Collection

The data in market research differentiate in two categories, which are primary

data and secondary data. Primary data is first hand data usually collected and analyzed

by government agencies, universities, or professional research companies through

interview, questionnaire survey, or focus group. However, secondary data is already

published by those agencies, institutions, and companies as mentioned previously with

specific purpose in mind, such as economic research from government agencies, market

research from marketing firms, or listed companies’ annual report. In this study,

secondary data is mainly be used. One of the significant advantages of using secondary

is cost and time saving.

There are various collection methods in qualitative case studies research,

including documentation, archival records, interview, direct observation, participant-

observation, and physical artifacts. Therefore, documentary information, as a secondary

data, is the main source in this study, and they are found through internet search with

Google Scholar and HELP University Resource Center’s online database. Documentary

information (referred to as documents) including news, articles in mass media, previous

academic research, written report of event, or company’s annual report. Although there

are not always accurate, but they are very useful to facilitate in any types of research to

provide a foundation database.

According to Yin (2009), the most important use of documents is to verify and

improve evidence from other sources. Documents were written for specific purpose.

Therefore, they may have limited application for other research purpose. However, they

can provide specific and useful evidences to verify information from other sources.

Researchers also can make assumption and judgment accordingly based on documents

collected.

27

CHAPTER 4

FINDINGS & ANALYSIS

4.1 Background

Malaysian Airline System Berhad (Malaysia Airlines) is the national air carrier

of Malaysia. Malaysia Airlines’ headquarter is located at Sultan Abdul Aziz Shah

Airport. It is operating flights from Kuala Lumpur International Airport and from Kota

Kinabalu Airport to around 80 destinations throughout Asia, Middle East, Europe,

North America and Oceania. It also operates domestic flights under two subsidiary

airlines – Firefly and MASwings. Other than airline transportation service, Malaysia

Airlines also offers airline cargo service, and aircraft maintenance, repair, and overhaul

(MRO) service for over 100 customers from around the world.

Malaysia Airlines founded in 1937 and registered as Malayan Airways Limited.

In 1966 after Singapore separated from the federation of Malaysia, the Government of

Malaysia and Singapore jointly acquired majority control of the company and named it

as Malaysia-Singapore Airlines (MSA). In 1972, due to national aspirations, Malaysia-

Singapore Airlines was restructured and split into two airlines, Malaysia Airlines was

born. Malaysia Airlines went public in 1985, listed in Kuala Lumpur Stock Exchange.

However, it was being privatized by its major shareholder on 8th

of August, 2014 – a

Malaysian sovereign wealth fund, Khazanah Nasional Berhad (Khazanah Nasional),

which owns 69.37% shares of Malaysia Airlines.

According to The Star, Khazanah Nasional privatized the struggling southeast

air carrier, Malaysia Airlines at the premium of the company’s most recent share price

at RM0.27 per share, cost RM1.38 billion. This represents a 12.5% premium to the

closing price on 7th of August (Thursday) at RM0.24 per share. Khazanah Nasional is

going to conduct a comprehensive review and restructuring of Malaysia Airlines, upon

its poor financial performance, net losses over the past three years, and poor stock

performance after two major disasters continuously happened within four months in

2014.

28

4.2 Share Price Reaction of Malaysia Airlines to the Disasters

In fact, Malaysia Airlines is one of the best safety airlines in the world. Until

year 2013, Malaysia Airlines experienced only two fatal accidents in 68 years of

operation. Malaysia Airlines also regularly receives notable awards for service and

comfort from airline rating agency Skytrax (Malaysiaairlines.com). However, the stiff

competition from low-cost airlines, such as Malaysia’s Airasia and Indonesia’s Lion

Air, cause Malaysia Airlines did not make annual profit since 2010 (Nytimes.com).

The two major disaster – the missing of flight MH370 over the Indian Ocean

and the tragic crash of flight MH17 in eastern Ukraine happened within four months

was cause Malaysia Airlines’ financial problem getting worse. According to The Wall

Street Journal, revenue of Malaysia Airlines from operations was fell 12.1% to RM3.33

billion. Company reported a net loss of RM576 million in third quarters (July-to-

September), compared with a RM375 million losses in the same quarter last year.

Figure 1 below shows the six-month trend of Malaysia Airlines securities via Yahoo!

Finance, it had been decline 35% in the first half of the year. Figure 4.1 to 4.4 are the 1-

year, 2-year, and 5-year trends of company’s securities as of 12 August 2014

respectively. Table 4.1 and 4.2 are the changes of share price reflecting the reaction of

public to the two major disasters of Malaysia Airlines respectively.

29

Figure 4.5: 6-month trend of Malaysia Airlines securities as of 12 August 2014

Figure 4.6: 1-year trends of Malaysia Airlines securities as of 12 August 2014

30

Figure 4.7: 2-year trends of Malaysia Airlines securities as of 12 August 2014

Figure 4.8: 3-year trends of Malaysia Airlines securities as of 12 August 2014

(Source: Yahoo! Finance, 2014)

31

Table 4.1: The closing share prices and trading volume of Malaysia Airlines between

20th February to 21

st March 2014, surrounding the missing of flight MH370 event on 8

March 2014 to reflect the asymmetric information in Kuala Lumpur stock market.

Date Close

Change % Vol ('00)

Fri, Mar 21 2014 0.240

0.005 2.13 326,772

Thu, Mar 20 2014 0.235

-0.005 -2.08 201,180

Wed, Mar 19 2014 0.240

0.005 2.13 123,657

Tue, Mar 18 2014 0.235

0.005 2.17 241,670

Mon, Mar 17 2014 0.230

-0.010 -4.17 1,034,827

Fri, Mar 14 2014 0.240

0.005 2.13 466,229

Thu, Mar 13 2014 0.235

-0.010 -4.08 641,044

Wed, Mar 12 2014 0.245

0.005 2.08 540,098

Tue, Mar 11 2014 0.240

- - 709,823

Mon, Mar 10 2014 0.240

-0.010 -4.00 3,974,516

Sat, Mar 08 2014 (MH370)

Fri, Mar 07 2014 0.250

- - 182,075

Thu, Mar 06 2014 0.250

0.005 2.04 650,760

Wed, Mar 05 2014 0.245

- - 208,642

Tue, Mar 04 2014 0.245

-0.005 -2.00 308,213

Mon, Mar 03 2014 0.250

- - 271,434

Fri, Feb 28 2014 0.250

- - 659,289

Thu, Feb 27 2014 0.250

-0.005 -1.96 656,590

Wed, Feb 26 2014 0.255

-0.005 -1.92 2,472,623

Tue, Feb 25 2014 0.260

-0.015 -5.46 1,112,165

Mon, Feb 24 2014 0.275

-0.010 -3.51 721,398

Fri, Feb 21 2014 0.285

0.005 1.79 269,379

Thu, Feb 20 2014 0.280

-0.010 -3.45 932,418

(Source: klse.info, 2014)

32

Table 4.2: The closing share prices and trading volume of Malaysia Airlines between

30th June to 1

st August 2014, surrounding the tragic crash of flight MH17 event on 17

July 2014 to reflect the asymmetric information in Kuala Lumpur stock market.

Date Close

Change % Vol ('00)

Fri, Aug 01 2014 0.220

- - 399,808

Thu, Jul 31 2014 0.220

- - 401,135

Wed, Jul 30 2014 0.220

- - 646,039

Fri, Jul 25 2014 0.220

-0.005 -2.22 324,368

Thu, Jul 24 2014 0.225

- - 968,444

Wed, Jul 23 2014 0.225

-0.005 -2.17 1,801,583

Tue, Jul 22 2014 0.230

0.030 15.00 2,916,188

Mon, Jul 21 2014 0.200

- - 1,804,376

Fri, Jul 18 2014 0.200

-0.025 -11.11 4,710,942

Thu, Jul 17 2014 (MH17) 0.225

-0.005 -2.17 195,387

Wed, Jul 16 2014 0.230

0.010 4.55 932,115

Mon, Jul 14 2014 0.220

-0.005 -2.22 100,560

Fri, Jul 11 2014 0.225

- - 115,364

Thu, Jul 10 2014 0.225

- - 263,649

Wed, Jul 09 2014 0.225

-0.005 -2.17 591,931

Tue, Jul 08 2014 0.230

0.005 2.22 346,389

Mon, Jul 07 2014 0.225

- - 225,407

Fri, Jul 04 2014 0.225

-0.005 -2.17 583,342

Thu, Jul 03 2014 0.230

0.020 9.52 2,015,422

Wed, Jul 02 2014 0.210

0.005 2.44 424,950

Tue, Jul 01 2014 0.205

0.005 2.50 335,786

Mon, Jun 30 2014 0.200

-0.010 -4.76 552,903

(Source: klse.info, 2014)

33

4.3 Exit Options for Malaysian Airlines

The several years of losses plus the two major disasters makes recovery of

Malaysia Airline becomes challenging. There are many points of views from

professionals regarding the future of Malaysia Airlines after the second disaster

happened. The hot topics are emerged: which exit options is the best option for

Malaysia Airlines? Declare bankruptcy or go private?

According to William Pesek from Bloomberg View, his believes that go

bankruptcy is the better option because it would free management to make bold moves

to turn things around, such as scale back its global ambitions by reducing long-haul

routes, and perhaps rebrand the company (BloombergView – 23 July 2014).

Singapore’s Business Times also suggests that Malaysia Airlines filing for bankruptcy

under Section 176 of the Companies Act is the better ways for Malaysia Airlines to

break out of the doldrums, gives it a fresh start, given that the owner and the asset

manager of Khazanah Nasional has ruled out selling off the company (Singapore’s

Business Times – 24 February 2014).

There are cases provided for reference, such as the Japan Airlines (JAL). Japan

Airlines filed the largest-ever bankruptcy by a non-financial company in 2010. Japan

Airlines successfully turn around its fortunes in six months after slashed jobs, flights,

and debt. It demonstrates that the bankruptcy of a national air carrier is not the end of

the world (BloombergView – 23 July 2014). Another case is American Airlines,

ValuJet, was merged with a smaller regional airline AirWays Corporation and renamed

as AirTran. In 2011, it was acquired by Southwest Airlines and becomes the largest air

carrier in the world (The Daily Beast – 08 January 2014).

However, letting Malaysia Airlines go bankruptcy is politically impossible.

According to Craig Jenks, an analyst at airline projects, it is politically impossible for

two reasons: Malaysia Airlines is a national air carrier, a symbol of national pride; and

it is bankrolled by a state-own investment fund, Khazanah Nasional, that does not want

the value of its investment to be wiped out.

34

Other than these two political reasons, Malaysia Airlines has 20,000 of staff

organized by a militant group, the Malaysian Airline Systems Employees Union

(MASEU). MASEU is the biggest and most vociferous union in the members of

Malaysia Airlines and it had successfully lobbied to unwind the share-swap agreement

between Malaysia Airlines and AirAsia Bhd in 2011. Therefore, it will be a challenge

for Malaysia Airlines negotiates with this powerful labour union (The Star Online – 13

August 2014).

In the report of Malaysia Airlines recovery plan announced by Khazanah

Nasional on 29 August 2014 has stated that the reasons it taking Malaysia Airlines

private is allows Khazanah Nasional to rebrand Malaysia Airlines by creating a new

legal entity. Creating a new legal entity allows management to reset the operating

business model and review all the supply and other existing contrasts. Management can

make the necessary decisions efficiency and effectively without go through the

complicated procedures as listed companies.

35

4.4 Potential Opportunities of the rebranded Malaysia Airlines

There is a strategic question for the executive leadership and board governance of

Malaysia Airlines to rebuild the struggling airline: What are the potential opportunities

for rebranded Malaysia Airlines?

According to the opinion of Oliver McGee, American strategists, writing in

LinkedIn Pulse, there are four essential fronts for them to realign company’s strategic

leadership. First, they have to create value for the regrouped Malaysia Airlines to broker

future deals in the marketplace. Second, they have to deliver the value to their

customers, employees, shareholders, and stakeholders of the future rebranded Malaysia

Airlines, as a more culturally cohesive airline in the Southeast Asia region. Third, they

have to transfer the value through the airline’s future reputation, integrity, and trust in

the implicit promise of Malaysia Airlines’ new brand, as a responsible and accountable

airline industry player in the southeast Asia region; Finally, they have to sustain the

value for the future rebranded Malaysia Airlines, as an industry partner in international

airline safety and security (LinkedIn Pulse – 31 July 2014).

Oliver McGee also reminds, in order to create a new value and make a different,

executive leadership and board governance of Malaysia Airlines have to learn about the

essence of Malaysia Airlines’ marketing leadership and value recovery in the region.

Other than that, they also have to very clear about the potential threats of Malaysia

Airlines’ sustainability in the modern economic environment of Joseph Schumpeter’s

‘creative destruction’ evolution (1942)1

of the international airline industrial

organization.

1 Creative destruction is a term in economics describes the incessant product and process innovation mechanism by which new production units replace out-dated ones.

36

In the recovery plan of Malaysia Airlines, there are four important factors

executive leadership and board governance of Malaysia Airlines are take them into

account, which are (i) the nature of the international air carrier industry’s transaction

costs (Refer Appendix 1 for Malaysia Airlines’ cost gap to its competitors); (ii)

Malaysia Airlines’ asset specificity of its air fleet and flight crew and staff capabilities

(Refer Appendix 2 for Malaysia Airlines’ distinct strengths).; (iii) Malaysia Airlines’

public-private governance coordination and control of the market in the Southeast Asia

region; and (iv) the contemporary thought on the potential value migration from

Malaysia Airlines after the two major disasters – the missing of flight MH370 and the

tragic crash of flight MH17.

After considering above all, executive leadership and board governance of

Malaysia Airlines have announced the ‘Twelve (12) Distinctive Feature’ in their

recovery plan (Refer Appendix 3) based on three schools of thought to create

competitive advantages for the rebranded Malaysia Airlines. The three schools of

thought are:

i. A ‘scale and scope’ school, such as reset the operating business model through a

more regionally-focused network, lower cost structures, and greater focus on

revenue yield management, to achieve scale and scope economies.

ii. A ‘resource-based’ school, such as relocate headquarters and operations from

Subang to Kuala Lumpur International Airport, strengthen leadership, and

strengthen assurance, integrity and safety functions, to develop unique

capabilities of customer satisfaction, responsiveness, and service.

iii. A ‘core competencies’ school, such as improving the information and

communications technology that cannot easily be imitated and substituted by

competitors, to builds rebranded Malaysia Airlines’ responsiveness by

employees and service quality to customers.

37

Privatizing Malaysia Airlines and creating new legal entity with a new leader

and management team enhances managerial autonomy and training in heightened

quality to customer. This is the hybrid ‘centralized- decentralized’ organizational

coordination in the classical spirit of Jensen-Mackling (1976) organizational theory of

the company. This allows rebranded Malaysia Airlines reduces transaction costs of

agency problem through the Malaysia Airlines’ investment in information and

communications technological interconnections to centralized decision controls for

monitoring risk compliance, and for board governance oversight at new headquarters.

38

4.5 Potential Threats of the Rebranded Malaysia Airlines

As mentioned in previous topic, in order to create a new value and make a

different, executive leadership and board governance of Malaysia Airlines have to very

clear about the potential threats of Malaysia Airlines’ sustainability in the modern

economic environment of Joseph Schumpeter’s ‘creative destruction’ evolution of the

international airline industrial organization. The creative destruction evolution and

entrepreneurial growth opportunity challenges of the international airline industry will

be the potential threats for the rebranded Malaysia Airlines.

Although Khazanah Nasional had announced the recovery plan helping

Malaysia Airlines to create competitive advantage and achieve sustainable profitability

by the end of 2017. However, Richard D’Aveni, professor of business strategy at the

Amos Tuck School, in his book ‘Hyper-competition: Managing the Dynamics of

Strategic Manoeuvring’ argues that the competitive advantage is impossible sustainable

over the long haul in this competitive environment. Knowing that the potential threats

of rebranded Malaysia Airlines, the company have to continuously reposition, and

meanwhile, play along with the four arenas of hyper-competition.

i. Cost and Quality.

Malaysia Airlines, as a premium airline service provider before privatization,

customers will still expect the same level of service from Malaysia Airlines

regardless how Malaysia Airlines position itself in the airline industry after

privatization. This is a challenge for rebranded Malaysia Airlines to lower down

its transaction cost and maintain its service at the same time because there is a

trade-off between cost and quality.

ii. Timing and know-how.

In the competitive industry, an efficient and effective value-chain is one of the

key factors affecting the survival of rebranded Malaysia Airlines. The rebranded

Malaysia Airlines must have a fast responsiveness in its information and

communications to reduce the transaction cost and risk.

39

iii. Strongholds.

When a company has strong core-competencies and becomes leader in the

industry, the company might face targeted governmental regulations or antitrust

litigation. For example, the patent war of Apple and Samsung in technology

industry.

iv. Deep pockets.

If executive leadership and board governance of Malaysia Airlines utilize

efficiently Malaysia Airlines’ distinct strengths, such as its airliner fleet

inventory and Boeing 777-200ER assets with a proper working capital

management, this may drive a rapid growth of excess-cash above its capital

structure and cause potential threats, such as:

Managers might increase dividend in heightened shareholder pressures;

Managers might build their empire through irrational mergers and

acquisitions without synergy and control valuation for the value of

shareholders and stakeholders, and thus

Managers do not have enough cash to invest positive net present value

projects.

40

CHAPTER 5

CONCLUSION

5.1 Future of Malaysia Airlines

That is undeniable that the hot topics of news in Malaysia are surrounding

Malaysia Airlines. The missing of flight MH370, the tragic crash of flight MH147, and

the privatization of Malaysia Airlines becomes the biggest news stories in 2014. Even

before, the news regarding the financial circumstance of Malaysia Airlines always is the

concern of Malaysian. Khazanah Nasional had been injected a cumulative RM17.4

billion in to Malaysia Airlines over 13 years, but still, there is no sign of a lasting

turnaround. A total of four restructuring plans have been proposed over the years, but

none of them is working. As mentioned in Chapter 4, working capital management

always the crucial threat for Malaysia Airlines. Malaysia Airlines’ workforce,

approximately 19.500 crew and staff, is far larger than its competitor, Cathay Pacific

and Singapore Airlines. However, Malaysia Airlines’ revenue per employee is just only

51% of Cathay Pacific and 38% of Singapore Airlines.

The recovery plan recognized the failing of the past and planning to create new

company, relocate Malaysia Airlines’ headquarter, review and reinforcement every

aspect of management system, in order to relist the company by the end of 2017. The

changes in leadership and management team, reduction of 30% in workforce, and

reduction of unprofitability of long-haul routes, which Mohan Ranganathan, a professor

Head of the Mechanics and Systems Department at the University of Tours agrees with,

also included in the plan to increase the competitiveness of Malaysia Airlines in the

industry. Oliver McGee, an American professor at Howard University, writing in

Linkedin Pulse also suggests management team should consider scenario-based

planning as their long-term strategic planning based on the information, includes the

audit of the external environment and internal self-analysis, in the recovery plan. During

the phase of planning, management has to identify numbers of possible strategic options

that established rebranded Malaysia Airlines’ key success factors. It will provide the

41

rebranded Malaysia Airlines a comprehensive outlook, as well as the needed strategic

drivers for rebranded Malaysia Airlines future continuously growth. Eventually, the

more dynamic strategic blueprint facilitates management team deal with the

uncertainties and risks.

There is unforeseen how effective of the recovery plan and whether the plan can

be successfully implement to overhaul the rebranded Malaysia Airlines, because theory

and practical is always different speaking. According to an article in World Finance,

There are many debates over the economic viability of national airlines. Emirates and

Singapore Airlines are the example of success cases; however, they are different with

rebranded Malaysia Airlines because they are operating as commercial entities but

enjoying the financial benefits of state ownership. The rebranded Malaysia Airlines now

is a 100% government-owned company without smaller stakeholders weighing in every

major decision, therefore, more mistakes could be made. Oliver McGee believes that

available cash reserves and passenger loads are the most critical drivers could foresee to

shape the future of Malaysia Airlines.

42

5.2 Limitation of the Study & Recommendation for Future Research

Single Case Study Research

This is a single case study that focuses on one of the route of privatization

transaction, which is selective capital reduction and repayment (SCR), and focuses on

one listed company, Malaysian Airline System Berhad. Yet, the bidder is state-own

investment fund, Khazanah Nasional Berhad. In this case, the privatization of Malaysia

Airlines also considered as re-nationalization. Therefore, this study can only provide an

in-depth review and analysis of the privatization of a struggling airline company in

Malaysia.

Depends on the research objective and the questions researchers intends to find

out, researchers may need many similar cases, such as companies in same country, same

industry, or the bidder is same in company type, in order to find out a more accurate and

generalizable answers for research questions such as ‘Why listed companies being taken

privatized through takeover/ SCR/ disposal asset routes?’; or ‘What is the critical

factors that may affects the privatization transaction?’. Hence, in future research for an

extent of this study, researchers have to do a multiple cases study to investigate and find

out the findings that can generalize to other situation.

Pure Qualitative Research

This is a pure qualitative research without any quantitative data support. This

study only can provide the reasons why listed companies being taken private. For

example, in this study we find out that listed company go private because their share

price is undervalued, however, there is no quantitative data such as financial ratio, to

indicates that to what extent the share value being undervalued, the possibility of the

listed company being taken private will be higher. Hence, that will be better for a

research using qualitative data to address ‘What’, ‘Why’, ‘How’ questions, and also

using quantitative data to address ‘To what extend’ questions.

43

Limitation Manpower & Time

This study is completed by individual within no longer than one year. Due to

the limitation of manpower and time, the referencing in this study is limited, as well as

the creative of presenting data after gathered and analyzed data. Therefore, this study is

not comprehensive enough. It is not generalizable to all listed companies in difference

industry and difference country.

There is no recommendation for this limitation as this is depends on the

requirements of University. There is always contains pros and cons for a decision.

Although group-based research able to provide a more comprehensive finding in

particular topic. However, there may have free-rider in a group-based research. In other

way round, researchers may learn a lot in individual-based research because from

submission of proposal to data collecting, organizing, analyzing, and presenting, the A

to Z of a research is single-handedly done by only one person, the researcher.

In personal opinion, individual-based research is suitable for bachelor degree

level students because we have to learn walk then only run. Bachelor degree level

students might first time started to do research, individual-based research provides an

opportunity for them to learn from zero how a research be conducted practically.

44

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50

APPENDIX 1

Malaysia Airlines’ Cost Gap (Malaysia Airlines recovery plan ‘Rebuilding a National

Icon’ page 16)

51

APPENDIX 2

According to the Malaysia Airlines recovery plan ‘Rebuilding a National Icon’ in page

18 and 19, there are several distinctive strengths for Malaysia Airlines:

Page 18

Page 19

52

APPENDIX 3

The ‘Twelve Distinctive Feature’ of Malaysia Airlines Recovery Plan (page 23)