A CASE STUDY ON THE MERGER OF PACIFIC CENTURY CYBERWORKS LTD AND CABLE & WIRELESS HKT LTD
by
LEE KA WING 李家榮 LIU CHI NGAI 廖志毅
MBA PROJECT REPORT
Presented to
The Graduate School
In Partial Fulfilment
of the Requirements for the Degree of
MASTER OF BUSINESS ADMINISTRATION
TWO-YEAR MBA PROGRAMME
THE CHINESE UNIVERSITY OF HONG KONG
May 2001
The Chinese University of Hong Kong holds the copyright of this project. Any person(s) intending to use a part or whole of the materials in the project in a proposed publication must seek copyright relaease from the Dean of the Graduate School, """"""wiiiTY~/^/J APPROVAL
Name: Lee Ka Wing and Liu Chi Ngai
Degree: Master of Business Administration
Title of Project: A case study on the Merger of Pacific Century Cyber Works Ltd and Cable & Wireless HKT Ltd
Name of Supervisor: Professor Leslie Young
Signature of Supervisor: ^y/^^yCy^^^ ^^^^^^
Date Approved: // ALa^ / i Abstract
This paper begins with the idea on examining the market efficiency and corporate governance of the most sizable merger and acquisition, amounted to USD38.1 billion, in the history of Hong Kong, namely PCCW & C&W HKT. Both companies are highly reputable in the region and the merger was widely recognized as a big leap-forward to both companies. Some analysts thought that the merger would bring a number of positive impacts such as synergic effects, broader market bases, more varieties on products and markets and stronger financial position to the combined company. All this optimism was reflected in the cumulative abnormal returns of both PCCW and C&W HKT, which were once as high as 27.45 percent and 32.45 percent respectively. Unfortunately, the market sentiments turned upside-down, the cumulative abnormal returns of PCCW and C&W
HKT sagged to -16.41 percent and -1 1.57 percent correspondingly two clays after the acceptance of the offer by the parent company of C&W HKT. In August, the merger was complete and PCCW had successfully raised the huge amount of debt’ USD 12 billion, from the regional banks for the deal. However, the story has not yet ended, scandals of
PCCW keep spreading the city such as unnoticed changes in accounting treatment and falsified biography of Richard Li, the Executive Chairman of PCCW, in its annual report.
The merger seemed to have done no good to shareholders. Share price of PCCW declined from HKS16.0 at the dale of merger to around HKS2.4 as at 10 April 2001. The plunge was not only due to the burst of the Information Technology bubble but also the series of disappointing moves done by top management of PCCW. ii
TABLE OF CONTENTS
ABSTRACT j
TABLE OF CONTENTS
Chapter I. INTRODUCTION 1
II. COMPANY BACKGROUND 3 Pacific Century CyberWorks Limited 3 History 3 Major Business 5 Performance 7 Management of PCCW g Shareholdings Distribution (Prior to the merger) 9 Cable & Wireless HKT ::10 History 丨(） Major business 11 Performance 12 Shareholdings Distribution (Prior to the merger) 13
III. RHASONS FOR THE ACQUISITION 14
IV. MAJOR EVENTS I7 Compclilivc bid by SingTel | 7 Anangcmenl tor the USS12 billion loan IS The Composite Document 19 Stoi ics Behind the OtIcrs (Prior lo the Vlcr^jcr) 20 Probable strategy of C&VV behind the acccplancc 21
V. FINANCING PACKAGE 24 PCCW F:c)uily Funding 24 PCCW Loan Rinding 25
VI. ANALYSIS ON THE EFFECTS OF CORPORATE AXNOl'NCHMENTS ... 27 Market Efficicncy 27 Methodology 28 AnnoLinccmcnls 29
VII. AFTERMATH Financial F\Ml"orniancc 3 | iii What Went Wrong? 32 Economic and Corporate Governance 34
APPENDIX 39
BIBLIOGRAPHY 46 1 CHAPTER I
INTRODUCTION
Mergers and Acquisitions (M&A) have spread all over the world in the past
decade, especially in the telecommunications industry. A number of impressive M&A
happened in Europe in the late 1990s such as the merger between the two European
giant- telecommunications companies, namely Vodafone and Mannesmann. Hong
Kong is not immune form this M&A fashion. The most stunning one was the
USD38.1 billion merger, the historical second-biggest in Asia, between the regional telecommunication company, Cable and Wireless HKT (C&W HKT), and the barely
10-month old Internet company, Pacific Century Cyber Works Limited (PCCW).
The merger sparked on 11 February 2000, the date that PCCW made an offer
to Far East (C&W FE), in purchasing all its 54% holdings in C&W HKT. PCCW was
set up in May 1999 for the sake of the backdoor listing of the territory's controversial
Cyberport development projects. C&W HKT had been at the heart of Hong Kong for
more than half a decade providing all sorts of telecommunication services to both
individual and institutional clients. In this case study, the historical and financial
backgrounds of two companies are discussed first. In the second chapter, a number of
reasons for the acquisition are proposed as the general recognized motivations behind
the merger. In the third chapter, the major events between the proposed date and the
formal merger date, including the bid made by PCCW, are examined. In the fourth
chapter, the financial packages are discussed and the authors would adopt the
abnormal return model to examine the market efficiency of the stock market of Hong
Kong in response to the news of the merger. To sum up. aftermath of the case is 2 discussed at the end of the paper in which the authors found that there were a few worth mentioning stories about the Corporate Governance of PCCW in Hong Kong. 3 CHAPTER II
COMPANY BACKGROUND
Pacific Century CyberWorks Limited
History
‘Pacific Century CyberWorks Limited' (PCCW) was one of the most legendary and influential blue chips in Hong Kong. Its stock price moved like a roller coaster, as shown in Figure 1, from approximately HK$5 per share at the end of 1999 to the historical high of roughly HK$26 in April 2000 and then plunged back to around HK$5 at the end of 2000. The story was not only composed by the reputation of its founder, Richard Li, one of the billionaires in the region, but also the astonishing and unprecedented acts that it had done, namely the acquisition of the traditional giant regional telecommunications company - Cable & Wireless HKT
(HKT).
Figure 1: Stock Price of PCCW
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PCCW was set up in May 1999 by acquiring and renaming a small listing company namely "Tricom" in the Stock Exchange of Hong Kong. The founder of 4 PCCW Richard Li said that "In the simplest terms Pacific Century Group aims to be
the leading Internet investment vehicle in the Asia-Pacific region, both by acquiring
and funding net ventures and by developing our own businesses." ^ So, it was once
very aggressive in acquiring or forming alliances with the other regional or
multinational Internet companies to achieve its goal.
The myth started from the May of 1999 when Richard Li invested HKD 2.46
billion in acquiring Tricom Holdings Limited for the sake of the backdoor listing of
the territory's controversial Cyberport development projects which worth USD 1.68
X billion. Basically, it was a property development project. We would further described
in the 'Major Business' section. As a result, the stock price of Tricom was
skyrocketing hundred-fold after the announcement. The newly formed company was
then renamed as PCCW.
PCCW has raised the attentions from all over the world. Barely 3 months after
its birthday, the global chip-producing giant Intel made an announcement in August
1999 that it would invest US$50 million in PCCW and supply chips, software and
systems to form the backbone of the new company's broadcast and Internet business.
The investment, combined with Intel's share of the earlier joint venture “Pacific
Convergence", would give the chipmaker a 13 percent stake in PCCW. Other than
that, in September 1999, PCCW and NASDAQ-listed CMGI, the world's largest and
most diversified network of Internet companies, agreed to a USD350 million equity
swap.
1 Interview with Richard Li, by Runckel & Associates December 1999 5 On 11 February 2000, PCCW has made a quantum leap in its business development, it made an offer to the parent company of C&W HKT, the British-hold
Cable & Wireless Far East (C&W FE), in purchasing all its 54% holdings in C&W
HKT. Less than three weeks after making the offer, the British accepted the offer and
PCCW had outbid its competitor Singapore Telecom. This type of merger and acquisition was unprecedented in Hong Kong as PCCW was barely 10 months old and had to raise US$12 billion to acquire C&W HKT, which was a huge amount in the history of the financial market in Hong Kong. After all, the merger was approved by the regulatory bodies, and the shares of C&W HKT was delisted from the SEHK on August 8，2000. On 17 August 2000, PCCW replaced C&W HKT as one of the 33 blue chips in SEHK.
With the booming of the global Information Technology-stock market, the share price of PCCW had once raised from a penny to the highest HKD28.5 on rumors of C&W HKT takeover in February 2001.
Major Business
Prior to the acquisition, the principal activities of PCCW and its major subsidiaries were investment in and development of technology-related businesses.
Investment in and development of a project to provide essential infrastructure for the formation of a strategic cluster of Information Technology (I.T.) and I.T.-related companies (the well-known "Cyberport Project") and investment and development of properties in the Hong Kong Special Administrative Region (HKSAR) and the
People's Republic of China. About 80% of its operating profit in Year 1999 were investment income from Internet-related business. 6
To further illustrate, its activities are summarized in the folio wings:
L Cyberport Project
Cyberport Project was actually a construction project assigned by the government of HKSAR in the wake of catching up the others in the information technology development. PCCW was responsible for designing, developing, constructing and marketing the Cyberport. The major property developers in Hong
Kong once complained the deal as the contract went directly to PCCW without any formal bidding. The project offered a mix of commercial, business, educational and recreational facilities to be completed in stages during 2002-2003.
The residential portion would be completed in phases during 2004-2007. These unites would be for sale. The proceeds, after development and financing costs of the whole project, were to be shared by PCCW and the Government of HKSAR.
2. Network of the World (NOW)
Generally speaking, NOW was a content provider, it was aiming at combining the capabilities of television, personal computer and World Wide Web by integrating television programming with synchronized multimedia content such as video clips, animation, graphics and text available on the internet. This was in service on 20 June 2000 and a number of popular cable TVs in the region have already carried its services such as the Interactive Television Service (iTV) of
Hong Kong Telecom.
3, CyberWorks Ventures
CyberWorks Ventures was the group's investment arm. Its goal was to become one of the leading Internet entity in Asia. The division proactively 7 identified key areas for investment, obtained equity stakes in promising Internet
businesses, took steps to maximize investee companies' growth potential and
leveraged their technical expertise and worldwide locations. For example, it has
4.65% stake in Sohu.com, China's first and largest Web portal and is listed in the
NASDAQ market in the United States.
Performance
Since the company had only been in service since 1999, there was no meaningful internal comparison for the company in terms of financial ratios. However, we could still take a glance at them.
Table 1: Financial Data ofPCCW, 1998-1999
Dec. 31,1999 Dec. 31,19^
Profit after Tax (HK$ million) 353 (61) Return on Assets 2.49% (17.79%) Return on Equity 3.06% (54.58%) Long-Term Debt/Equity 9.43% 16.79% Pre-Tax Profit Margin 231.91% (21.67)% Current Ratio 4.42X 0.78X Earning/(Loss) per share HK$9.99 (HK$13.44) Source : 1999 Annual Report ofPCCW
Referring to the table, there was a significant difference between the ratios in
1998 and the ones in 1999 and the major reason is that those ratios in 1998 were solely reflecting the performance of Tricom. For the fiscal year end 31 December
1999, PCCW had an exceptionally high Pre-Tax Profit Margin of 231.91%. It was due to the fact that it changed its accounting policy in classifying investments as current assets instead of the traditional-practice as Long-Term Investments. According to the
Statement of Standard Accounting Practice of Hong Kong Society of Accountants, if an investment was classified as a long-term one, no unrealized gains were allowed to 8 record under the Income Statement. On the other hand, as PCCW did, by classifying the investments as the current assets, the unrealized gains could be considered as an income and stated under the Income Statement and that figure was approximately 537 million in 1999.
Management of PCCW
It had been widely accepted that the management of a company was crucial for the future of a business. Influences from top management ranged from strategic planning to the daily operations of the business. Furthermore, there was a common goal of management across all types of business, which was to achieve the highest value for shareholders. So, as a result, we thought that it was worthwhile to have a layout of the managerial structure of PCCW.
The Executive Chairman
Richard Li was the younger son of the Asia Tycoon Li Ka Shing and had studied computer engineering from Stanford University for 3 years, with one year left before the formal graduation. His father, dubbed "superman" by the local press, headed the two of the most influential giant companies in Hong Kong which were
Cheung Kong (Holdings) Ltd. and Hutchison Whampoa Ltd. These two companies had interests including property, utilities, container port operation, supermarkets, a retail electronics chain and gasoline stations. Having inherited his father's wealth,
Richard invested USD 125 million, which was came from his father, in launching Star
TV in 1990, Asia's first satellite delivered cable television system. After 3 years, in
1993, he sold the whole business to media baron Rupert Murdoch's News 9 Corporation at USD950 million. That brought Richard Li the capital to set up Pacific
Century Group in October of that year engaging in developing digital media, financial services and infrastructure. Most recently, other listed companies under the group include Singapore-listed Pacific Century Regional Developments Limited (PCRD),
Hong Kong-listed Pacific Century Insurance Limited, and PCCW. The USD38.1 billion cash and share offer made between PCCW and C&W FE came second regarding Merger and Acquisition in Asia, which is after the union of Bank of Tokyo and Mitsubishi Bank which amounted to US$38.3 billion.
Shareholdings Distribution (Prior to the merger)
CMGI PCG/PCD PCRD Intel Public
3.24 ^ 52.2»/. 28.7«/c
PCCW
Source: Explanatory Statement, Proposed Acquisition Scheme to HKT, 2000
According to the 2000 interim report of PCCW, Li Tzar Kai, Richard held the entire issued share capital of Pacific Century Group Holdings Limited (PCG) and
PCG indirectly held 75.8 percent of the issued share capital of PCRD. At the same time, Li Tzar Kai Richard also held the entire issued share capital of Pacific Century
Diversified. That means Richard Li had indirectly hold 48.1 percent of PCCW. 10 Cable & Wireless HKT
History
Cable & Wireless (C&W) (then Cable & Wireless HKT) had been at the heart of Hong Kong since 1936. It provided all sorts of telecommunication services to both individual and institutional clients such as fixed line and broadband Internet services.
Its parent company, Cable & Wireless PLC (C&W PLC), in which C&W FE was its wholly owned subsidiary, was the leading provider of integrated communications offering a range of services spanning interactive entertainment and information, broadband data, Internet access and television as well as fixed and mobile voice.
In October 1981, C&W was granted an exclusive 25-year right in operating the international telecommunications systems in Hong Kong. However, the government of HKSAR had terminated the agreement eight years before the termination date of the contract in 1998. The reason was that the government would like to liberalize the telecommunication markets, especially the International
Telephone Services (IDD), the government spent about HK$6 billion to retract the license granted to Hong Kong Telecom. In 1988, C&W was approved to merge with
Hong Kong Telephone (HKT) and the combined company was called Hong Kong
Telecommunications Limited. In the fiscal year 1998/1999, Hong Kong
Telecommunications was renamed as Cable & Wireless HKT. Prior to the merger,
HKT was a listed company and 80 percent owned by C&W FE, had the exclusive right to provide local public telephone facilities and basic telephone services in Hong
Kong before the merger. It was thought that the merger could allow C&W to achieve greater value, gain benefit of future development and build a local image. Eventually, 11 it was proved by the splendid results of C&W HKT (formally known as Hong Kong
Telecommunications Limited) after the merger. For the past decades, C&W HKT was a cash cow and implemented a high-dividend policy, its mother company, C&W FE, had received billions of dividend from C&W HKT.
Before the acquisition, C&W FE had 54% stake in C&W HKT. C&W FE, as mentioned above, was a wholly owned subsidiary of C&W PLC and was founded by
John Pender, the founder of the Eastern Telegraph Company, started his own business in 1872. C&W PLC was playing a major role in the establishment and development of telecommunications around the world. C&W PLC had entered the market of Hong
Kong since 1936 and on 1 October 1981, C&W was established. The Financial
Secretary Incorporated of the Hong Kong Government and C&W FE had 20% and
80% stakes in C&W respectively. However, right before the selling of the shares to
PCCW, C&W FE's shares had dropped to 54% only. According to the Annual Report in 2000 of C&W PLC, the reasons for selling the investment were to simplify and focus the portfolio, increase financial strength and increase funds for investments to execute its strategy. The contribution of C&W HKT in the group's Global turnover had dropped from 32% to 24% between 1999 and 2000.
Major business
/. International Telecommunications
C&W HKT had kept investing in the international network infrastructure. Its
revenue was not only from providing IDD services to both business and
residential customers but also by leasing its circuit capacity to others in response
to the increasing demand of the Internet and data services. 12 2. Local Telecommunications
C&W HKT had invested a territory-wide all-digit local fixed-line network
which supported delivery of a wide range of advanced calling features, fax, data,
Internet and integrated network services.
3. Mobile Services
C&W had an excellent and comprehensive infrastructure for the mobile phone
market, it was widely accepted as the highest-quality service provider in the
region and played as the leader in terms of market share.
4. Internet and Interactive Multimedia Services (IMS) & Broadband Services
C&W HKT had made a significant investment in the world's largest
asynchronous transfer mode (ATM) broadband network and had extended
coverage during the pervious years to reach more than 75 percent of Hong Kong's
households and the major business areas. The high-speed configuration was
specifically designed for the transmission of video-streaming services such as the
Interactive Television (iTV) services and the Internet, data and voice services.
Performance
Table 2: Financial Ratios of C&W HKT in 1999 and 1998 �
Dec. 31, 1999 Dec. 31, 1998
Profit after Tax (HK$ million) 11,507 17,028 Return on Assets 21.3% 31.4% Return on Equity 30.3% 46.1 % Long-Term Debt/Equity 2.3% 2.0% Pre-Tax Profit Margin 40.5% 40.8% Current Ratio 1.5X 1.4X Earning/(Loss) per share HK$0.964 HK$1.438 Dividend Payout 88.4% 59.2% Source: C&W HKT 1999 Annual Report ‘ 13 Generally speaking, C&W HKT was a financially sound company, with very healthy balance sheets, income statements and cash flow statements. According to
Table 2，we could see that it enjoyed an exceptionally low percentage of Long-Term
Debt to Equity, which were only 2.3%. Other than that, it had a very high pre-tax profit margin and meanwhile, a remarkable dividend payout ratio. As the higher the dividend payout ratio, the more the cash return its parent company, C&W FE, could get and according to the Hong Kong Taxation Ordinance, dividend incomes in Hong
Kong is not taxable.
Shareholdings Distribution (Prior to the merger)
China Telecom (Hong Kong) C&W FE Public Group Limited
10.8% 54.19^. 35.1%
HKT
Source: Explanaton' Statement, Proposed Acquisition Scheme to HKT, 2000 14 CHAPTER III
REASONS FOR THE ACQUISITION
1. Synergy
As mentioned above, PCCW was striving to become a leading Internet
company in the Asia-Pacific region, and therefore the skillful employees, the
technological know-how and extensive infrastructure of C&W HKT would shed a
light on it. In one occasion, Richard Li said that the deal represented the marriage of
the head, with the arms and the legs and the body. For example, PCCW had had only
moderate success signing up local cable operators in China for its broadband project.
C&W HKT might use its technological know-how to work with China Telecom to
develop broadband access through local phone lines.
2. Political Reasons
To a certain extent, the telecommunication industry was very sensitive and had
strategic importance. As a result, some analysts thought lhat the quick deal formed
between C&W FE and PCCW might due to the political pressure from the mainland.
As it was widely recognized that Li's family had a long-term relationship with the
Chinese Government, there were rumors that this might be the critical reason for
PCCW to outbid the other bidder, Singapore Telecom.
3. Enlarging customer bases
According to the 1999 annual report of PCCW, the merger would add over 6
million addressable customers across multiple platforms to his initial target of
130million cable-enabled homes and another 12 million readily upgradable homes. It
would also add approximately 3.3 million telephony customers. 1 million wireless 15 customers, 400,000 Internet users, 90,000 interactive television users and 22,000 broadband customers to his initial target market. This would definitely be a stepping stone for PCCW to achieve its goal.
4. Product & Market expansion
The merged company would own a large and diversified portfolio of investments which, prior to the merger, had been made separately by each of C&W
HKT and PCCW. These investments had the potential to create value in their own right, to facilitate co-operation with strategic partners as well as to provide synergies with existing operations through early access to new and developing technologies and businesses. These were expected to contribute to the merged company's capability to bring new products and services quickly to market. Speed-to-market with new applications and services was a necessary competitive advantage in the Internet and e- commerce sectors.
5. Huge reserve of cash and resources
Since it was widely accepted that Internet companies have to burn huge amount of cash at the initial stage, acquiring a company which was generating a steady cash inflow would ease the pain. C&W HKT had a low debt level and a very steady and sound cash inflow every year. For the fiscal year 1999，C&W HKT had
HK$7,135 million cash and cash equivalent inflow compared with HK$2,936 outflow
(excluding the proceeds of HK$6,846 million from the issue of new ordinary shares, which was not feasible for long-term fund raising purposes) of PCCW. So, some economists thought that it might be one of the reasons for PCCW to acquire it.
However, PCCW had to secure a syndicated loan of approximately US$12 billion to 16 finance the merger and this would bring a significant interest burden to the combined company. Regarding this, lots of analysts said that Richard Li might spin off or even sell part of C&W HKT operations later on to reduce the debt and interest burden. 17 CHAPTER IV
MAJOR EVENTS
At the beginning of February 2000, the stock price of PCCW had reached the historical high of HK$28.50 on rumors of the C&W HKT takeover. On 11 February
2000, PCCW formally made its offer for C&W HKT and reached the agreement with
C&W FE on 28 February 2000. At the same time, Singapore Telecommunications
Limited (ST) had confirmed that it had been talking to C&W PLC since the
November of 1999.
Competitive bid by SingTel
ST was the largest company in Singapore and was 78 percent owned by the government. Although ST had admitted the bid, the details of the bid had never been made public. It raised its initial offer after Rupert Murdoch agreed to invest $l billion in ST if the company succeeded in buying C&W HKT. Some analysts said that the deal between PCCW and C&W PLC was prompted in part by the support of Beijing- owned China Telecom, which had 10.8% of C&W HKT. Li, C&W PLC, the governments of Hong Kong and China all deny that politics - and pressure from
Beijing - played a role. A lot of people were not convinced. When a SingTel-C&W
HKT merger looked imminent in January, Hong Kong politicians began sounding off about the Singapore government's influence over C&W HKT. Sin Chung-kai, a legislator representing the information-technology industry, accused Singapore of trying to buy C&W HKT because its telecom market lagged Hong Kong's and expressed fears about possible meddling by Singapore politicians in the merged entity.
Beijing-controlled newspaper Wenhui Daily weighed in with a report that the central government has "indirectly expressed its disapproval of the [SingTel-C&W HKT] 18 merger." Declared the daily: "If Cable & Wireless intends to sell its stake, there are
quite a few consortiums in Hong Kong financially strong enough to buy it."
It escaped no one's notice that a Bank of China subsidiary, BOCI Asia Limited,
was helping PCCW with its bid, along with European investment bank Warburg
Dillon Read. Besides that, HSBC abruptly resigned as an adviser to the independent
directors of C&W HKT. News later broke that its commercial-lending arm would
lend PCCW money for its bid. A furious ST reportedly threatened to sue HSBC. The
bank had access to sensitive information about ST's offer because it attended briefings
for C& W HKT's independent directors. The lawsuit has yet to materialize.
Arrangement for the US$12 billion loan
In order to cornpl ete the transaction. PCCW had to arrange a huge aInount of
loan to finance th e deal. Considerin g PCCW. vvhi ch is an Intern et start -up. with
absolutely no credit hi story. little cash fl ovv and its initial grovv' th fu e ll ed alIllost
entirely hy a ~l u ck Ill arkcl i"rcnl. Y in tech stocks. it \vas redSOllablc tu thilt" tll lll tile
loan could be hardl y achie\'ed , In credibl y. lat ely ;' lner PCCW nlade the deal \vith
C&W PLC. il s u cce~s i"ull y lubbi ed the !;,lrgesl syndi cat ed loan c\'er in As ia of
appr() \inlatel) LSS 1_ hilli on to rin i. mce the Ill erger. It signed an agree lllent for th e
loan \\'ith ~r~ int ern i. lti unJ I h ank ~ . le d h} B;,tnk of C hin a. HSBC Holdings . Ba r c l;,l Y ~
Car ita I a 11 d B N p, The I() an \ \' ~ IS ll " e d t () III e et th e c i. Ish P() rt i() n () r th e C &. W H KT () rr e r
an d as ad iiti onJI \\ ' o rkin ~ ci. lpi tal. ~ () t ( nl y th e alllount of th e IOi. lI1 \Va~ unprecedent ed
in As ia but al.. the ri.ll io of the lea!. ,-\cc () rdi n ~ to the Fi nance \ ~ i a , c o l n . th e avcraue ~ c
ic btlEbitda r)!" a Eun pean deal \\'uuld n< t Ill nre lhan ) ,5 linlC\. ho\\'c \-C L th e 1 ()~ LIl of
PCC\\ 'arried a rali) oi"n ill ' l illle ~ hi. l~ C I nil C\:\\' HKT'" Ch il d;, t or S] hi lli ()n , 19 The Composite Document
On May 26, 2000, C&W HKT posted a detailed circular (the "Composite
Document") to its shareholders which provided: I) details of the background to and terms of the PCCW offer. II) the views of the Board of Directors of C&W HKT. Ill) the recommendations of the C&W HKT Independent Board Committee and its
Independent Financial Adviser, ING Barings Asia Limited. IV) details of the proposed Scheme and certain other relevant information.
It was proposed that, under the Scheme, all C&W HKT Shares in issue at the
Scheme Record Time would be cancelled and each Eligible Shareholder would be entitled to receive, at his option, for his entire holding of C&W HKT Shares at anyone of the following basis:
1. Share Alternative
For each C&W HKT Share: 1.1 new PCCW shares, valuing each C&W HKT
Share at HK$15.9 based on the Latest Practicable Date (22 May 2000).
2. Combination Alternative
For each C&W HKT Share: US$0,929 (or HK$7.23 based on the Reference
Rate HK$7.78/US$) in cash and 0.7116 New PCCW Shares, valuing each C&W
HKS 17.51 based on the closing price of PCCW Shares on the Latest Practicable
Date (22 May 2000). 20
3, Mix and Match
Any Eligible Shareholder might choose the Share Alternative in respect of any
part of his holding of C&W HKT Shares and the Combination Alternative in
respect of the balance of his C&W HKT Shares.
Share Combination Alternative Alternative HK$ HK$
Number of New PCCW Shares 1.10 0.7116 The closing price of PCCW Shares on 22 May 2000 14.45 14.45 Equivalent value 15.90 10.28 Cash (translated at the Reference Rate) -- 7.23
Value of each C&W HKT Share 15.90 17.51
Stories Behind the Offers (Prior to the Merger)
There were about 12.16bn HKT shares in issue at the time PCCW proposed the offers, so the maximum amount of cash that would be paid under the offer would be US$11.3bn. That's how they arrived at US$0,929 per share.
The interesting thing about the two alternatives were that, if the share price of
PCCW fell below HK$18.62, then the Combination Alternative became worth more than the Share Alternative. At $18.62, the Share Alternative worth $20.48 while the share part of the Combination Alternative worth $13.25, and the cash element worth
$7.23 (making $20.48, ignoring dealing costs).
Shareholders were also allowed to apply for an "Increased Cash Election" which represented the distribution of any cash element that other shareholders did not 21 want (because they've elected to receive the Share Alternative). In other deals, this had been called a "mix and match" election.
Probable strategy of C&W behind the acceptance
C&W, the 540/0 shareholder of HKT, had undertaken to choose the
Combination Alternative and make the Increased Cash Election. If everyone else went
for the Share Alternative, then C&W would get the whole US$11.3bn (and 11.2 0/0 of
PCCW). This undertaking meant that it was a certainty that PCCW would end up
paying out the full amount of cash if the offer proceeded, and there was no chance
that they would be able to do the whole deal with paper. The question was not
whether they would payout the cash, but who got it.
Besides C&W. there were t\VO large shareholders - China TC\cC()lll and the
K()IH! A uthorit y the Fund l. It \\'ould he' illtere"tin (l II()n ~ ~ ;Vl()net~H\~ ~ ( throu~h~ E .\chall~e~ ~
tu KIlOW whether they had decided to ~lccept the C()lllhin~lti()n 1\lternati\'L' ~lIld the
II III 'I' 'fl)I" I e' ' ~lllle TlIci;t1 10 C(\:\\' IIl;lt Ihe PCC\\' price did flul 1';111 fllllC h
iI I y' ill' III d i 11 ~ I h' f I f\. \ 1: \ ; III I C Il i fl ; I T e' le c () Ill ) \ \, ' () ul d e k c I 1'0 r the
~ I1lhinaliul1 :\ Il I'n;lll\' r illll Iy fl I ;1' 'LPl ), Th ~ll \\ ollld !c;l\'C C ,,\\' \\'ilh only 22 C&W had already said that it would sell 4% (around US$2.5bn) of PCCW "as soon as practical following completion of the Offer". This would take it below 20% which was important to the accounting treatment of the disposal. If C&W's stake in
PCCW is less than 20% then it is accounted as an "investment" while 20% or more makes it an "associate". As an investment, C&W could carry it at cost (and book a full profit on the sale of HKT) rather than writing off the enormous amount of goodwill in
PCCW that equity accounting an associate would require.
C&W had also agreed with CMGI to swap of US$500m of PCCW stock
(about 1% of the enlarged company) for the same amount of new CMGI shares. Out of the CyberWorks (you heard that term here first) and into the frying pan, you might think, but at least it's diversification.
If the PCCW price stayed above the crossover point and C&W was able to get all of the US$11.3bn in cash and 11.2% of PCCW, then by placing 4% and swapping
1% with CMGI it would be down to 6.2% of PCCW, or around 1.4bn shares.
Other than that, C&W had agreed not to sell any more for 6 months and then hold at least half its original holding (5.6%) for a further 6 months.
It was notable that there were not any other major telecommunications players entering the fray. C&W signaled its willingness to deal in early February with the announcement of the proposed merger with Singapore Telecom, so there was plenty of time for others to raise a hand by now. We might have expected major players such as British Telecom (which already has a stake in SmarTone) or AT&T (which once 23 had a stake in SmarTone), Deutsche Telekom or MCI Worldcom to have made a pJay.
Sadly not - perhaps they felt that HKT was already fully priced and offered an unattractive story. 24 CHAPTER V
FINANCING PACKAGE
Table 3: Summary of the financing package was listed as the following:-
Acquisition of HKT HK$ bi^ [Fund Sources Net Assets Acquired 49.36 Cash 88.14 Goodwill 171.60 Issuance of 132.82 8,653,056,000 New Shares @ HK$15.35 Total 220.961 |Total 220.96
PCCW Equity Fiinding
The major contributing factor for why PCCW could grow from a start-up to an
Asia telecommunication giant was its amazing ability to raise funds from the capital
markets. In the 9 months before the announcement of the merger, PCCW has
conducted five share placements and a US$50 million issue to Intel, raising an
estimated total of US$2,377 million net of expenses, as shown in the table below:
Announced Shares $/share Gross HK$m Net HK$m Net US$m Use of Fund 3-May-99 1.151,056,000 0.31 357 329 42.3 Acquisition ofTricom (then
PCCW) Aug-99 77.800,000 5.00 389 389 50.0 Invest in Pacific
Convergence Corporation. Ltd. in order to enable it to purchase equipment from Intel 13-Sep-99 414.000,000 5.55 2,298 2,247 288.8 Operational launch and
development of" the business of Pacific Century Convergence Corporation Ltd.", a 60% owned subsidiary of PCCW >3-Oct-99 668，863，000 6.10 4,080 3.992 513.1 Investment in SoftNet
Systems 25-Jan-OO 248,000,000 15.80 3,918 3,833 492.7 Investment in CMGI Asia
and the implementation of its business plan 14-Feb-OO 335,000,000 23.50 7,873 7,704 990.2 Merger between PCCW and HKT
2,894,719,000 18,914 f^~ Note: the above table assumes that the over-allotment option for the placing announced on M-Feb-00 will be exercised. 25 PCCW Loan Funding
The merger was a classical leverage buyout case, which was one of the largest deals of such kind in the M&A history. PCCW lined up a 364-day bridging loan of
US$12 billion in size in order to finance the merger. Effective interest rate of the bridging loan was around 6.5%. Compared with some analysts' valuation of US$21.9 billion for HKT, this loan amounted to 55% of value. This was also equivalent to the sum of the US$11.3 billion cash element of the offer and the US$0.7 billion dividend that HKT will pay out.
PCCW on 12 April 2000 announced that a memorandum of agreement was made with Telstra to sell a 40% interest in something it had yet to own, the C&W
HKT wireless business. The deal also includes a US$1.5 billion convertible loan from
Telstra. The transaction represented the building up of strategic alliance between
PCCW and Telstra. The purpose of the deal, from PCCW's perspective, was to use the proceeds from selling the HKT asset to pay down part of the huge debt amounting
US$12.0 billion raised to acquire C&W HKT.
The strike price of the option embedded in the convertible loan was at
HK$23.69 per share, a price at which PCCW shares only briefly touched before their unstoppable dive. PCCW had to pay interest at 3% p.a. quarterly stepping up to 5% p.a. after 4 years. At Telstra's option, half the loan note could be redeemed after 4 years, and the rest after a further 2 years. PCCW could only force the note to convert after 4 years if the share price (averaged over 15 days) exceeded $28.43, or after 6 years if the share price (again averaged) exceeded $26.06. This looked almost
impossible from today's perspective following the burst of Internet bubble. 26 The Telstra debt is subordinate to the US$12bn loan advanced by Bank of
China and colleagues for the C&W HKT takeover. Unless the PCCW share price got up above the conversion price, Telstra would order its money back. 27 CHAPTER VI
ANALYSIS ON THE EFFECTS OF CORPORATE ANNOUNCEMENTS
The merger of PCCW and C&W HKT was so far the second largest M&A transaction ever in Asia, and therefore had drawn much attention from the society and the investment public. We believed that by analyzing the effects of the corporate announcements on the stock price of the companies at various time periods during the process of the transaction, we would be able to reveal a significant part of the picture regarding market efficiency in Hong Kong's securities market.
Market Efficiency
To analyze the effects, the first question was actually when and how fast the market reacted to the M&A announcement, that was market efficiency. There were three forms of market efficiency: strong form market, semi-strong form market and weak form market. Definitions of the forms of market are as the folio wings:-
• Weak-form efficient market, in which historical share-price data obtained no
information that can be used to earn profits in excess of those produce by a naive
buy-and-hold strategy.
• Semi-strong form efficient market，for which the stock market steadily and
accurately incorporates all publicly available information into share prices. The
only way to make profits in excess of a buy-and-hold strategy is to have inside
information.
• Strong-form efficient market, for which the stock market and its quoted firms
are so well regulated that no substantial and consistent use of inside or 28 monopolistic information can be made. Whilst there is bound to be some use of
inside information, there is so small that it does not disturb the market efficiency.
Research found that more developed stock markets, such as U.S., Japan,
Europe, and Hong Kong, were semi-strong form markets. The semi-strong form of the efficient markets model implied that investment analysts were valuing securities effectively, with share prices giving accurate values by which resource allocation can be optimized.
Methodology
The methodology we used in our analysis was the one that directly tests the semi-strong version of the efficient markets theory. The test set out to see if the stock market accurately and speedily adjusted share prices on the release of fundamental information. The methodology used in our research followed that used by Fama,
Fisher, Jensen and Roll in their analysis of stock splits. This involved comparing actual share price performance against that expected, after removing the general price
influence. The difference between the actual and predicted prices are represented by
the term U„ = R, , -
Where R丨 t is the actual proportionate change in the share price of security j in
time period t and the p丨R^., term is the price predicted by the market model, p丨 is the
volatility of the share price to changes in the market index and is found by regressing
the proportionate (or logarithmic) changes in the share price of security j on
proportionate (or logarithmic) changes in a market index.尺丨几，is the actual
proportionate change in the index. 29 We would analyze the error residuals (Uj ,) and the cumulative total of these, in order to ascertain the impact of the news on prices and whether this adjustment was done quickly and accurately in a theoretical sense. Many past studies found that the stock market reacted in the right and expected direction, and that the adjustment was completed in a very short period of time.
+ 10
l=-10
CUj.t is the cumulative error residuals or cumulative abnormal returns.
Announcements
On 11 February 2000, PCCW made a formal offer to C&W HKT. On 14
February 2000，the next trading date after the announcement, the share price of C&W
HKT surged to HK$26.40 from HK$21.65, representing an increase of 21.9%.
Abnormal return due to the announcement was 22.94% and cumulative abnormal return was high at 27.45%. Although share price of PCCW remained unchanged on
14 February 2000, it increased by almost 7% to HK$26.35 on the next trading date, achieving a record high closing price ever. Abnormal return on the day was 8.82%, which raised the cumulative abnormal return to 32.54%.
Within the period of our study i.e. 10 days before and 10 days after the announcement date, cumulative abnormal return was 26.10% and 13.68% respectively.
The high abnormal returns reflected the positive expectation of investors on the merger of the two companies. Shareholders of both companies believed that the merger would create synergy and benefit to them. 30 On 28 February 2000, PCCW successfully outbid the other competitor,
SingTel, and agreement was made between PCCW and C&W HKT on the merger.
Trading was suspended for both companies on 29 February 2000. On 1 March 2000, share price of C&W HKT and PCCW dropped respectively by 12.33% and 7.90%, with abnormal return of -10.56% and -6.49% respectively. Cumulative return as at 1
March 2000 for C&W HKT and PCCW was-11.57% and-16.41% respectively.
Within the period of our study i.e. 10 days before and 10 days after the announcement date, cumulative abnormal return was -12.88% and -15.53% respectively. The negative abnormal return might due to change in shareholders' expectation. Shareholders might find that they had overestimated the possible synergy that could be created by the merger of the two companies. Therefore price adjustments were happened to both companies to correct the overshot share prices as a result of the previous announcement. 31 CHAPTER VII
AFTERMATH
The merger of the telecommunication giants seemed to have done no good to shareholders of both PCCW and C&W HKT. Share price of PCCW declined from
HK$16.0 at the date of merger to around HK$2.4 as at 10 April 2001. For shareholders of C&W HKT, provided that they rationally chose the combination alternative in which they were offered HK$7.23 plus 0.7116 PCCW share, the total value remained in hands would be around HK$8.94. The remaining value was significantly lower than the C&W HKT's closing price of HK$16.7 at the last trading date. Some people might argue that the evaporation of value was due to the worldwide sentiment on TMT stocks and PCCW should not be supposed to immune from that. In the following analysis, we would discuss the reasons for the fall.
Financial Performance
In March 200L PCCW announced the second largest loss for Hong Koim company ever after Akai Holdings' HK$I3.40b. The financial results of PCCW lor the year ended 3 1 December 2000 revealed that the company made an operating profit of HK$520 million. However, an one-off provision for the reduced value of some of the company's investment in Internet stocks and the written-off goodwill arising from the merger, had dragged PCCW lo a net loss of HKS6.90b. A fie^citive equity of
HKS14.1 billion was reported. The company, in 2000, paid a total of HKS2.36 billion
in interest alone. The amount was expected to increase further to HKS3.82 billion in
2001 according to the forecast of PCCW. Together with the expected capital 32 expenditure of around HK$4.12 billion, the cash burden on the company would still be huge in 2001.
What Went Wrong?
Apart from the global slump of TMT stocks, we believed that the poor performance of PCCW was due to following five major reasons.
1. Fierce competition in the deregulated Hong Kong telecommunication
market
Telephone line operation was one of the major income sources of PCCW.
Before the deregulation in 1999，C&W HKT had long enjoyed its monopolistic
right to operate domestic and international calls. As the markets were open up for
competitors, competition has been intensifying and decline in revenue from
operating telephone lines seemed inevitable. In 2000, IDD traffic for PCCW
dropped by 34%, which was beyond expectation of many analysts. We expected
that the competition would further erode the former cash cow when new entrants
and substitutes were coming up.
2. Lack of self-producing content of quality for NOW
Some people viewed that the merger of PCCW and C&W HKT was a carbon
copy of Time Warner and AOL, as both cases were merger of content and
delivery infrastructure. In our opinion, the major difference between the two cases
was the difference in quality of content. First, Time Warner was a world
renowned content production company with many famous brand names, movies,
magazines, cartoon characters, etc. However. PCCW has yet developed a mature 33 content development center and was totally dependent on licensing of content from other producers. Though it has already invested in its production centers in
London, Japan, Hong Kong and India, the investment was still not generating results. Second,
3. Questionable strategic development direction
In order to become less dependent on fixed line businesses, PCCW has put a lot of efforts on developing as a total network and system solution provider by means of acquisition e.g. acquire HTTIL and huge capital expenditure. In fact, we believe that PCCW just entered into another battlefield competing with some
global experienced players. This time, competition was not just from some local companies with limited financial backup, but networking giants like Cisco
Systems, IBM, and SUN, which have long been rooted in the market. That was
therefore the reason why many analysts voiced out that the firm's real opportunity
was in capitalizing on its three-million customer base and becoming the provider
of all communications services within the home.
4. Difficult to re engineer culture after merger
People could easily be able to expect that there was a huge gap between the
culture of PCCW and C&W HKT. C&W HKT was an old-fashioned British
utility company that was long protected by its monopoly. Marketing and business
development was never an important issue in the company. For PCCW, it was an
internet/technology company where performance linked with rewards. People in
the company had to deal with dynamic market changes and respond in no time to 34 unprecedented and unpredictable issues. Therefore, we believed that there were
difficulties in consolidating the culture.
5. Depth of experience of management
We had little doubt about the competency of the management in playing
games in the financial markets, as quite a number of people in the management
team were from investment banks. That's why they were able to complete the
largest M&A mission in Asia outside Japan. However, to handle a company after
merger, which was facing a lot problems namely market deregulation, culture
reengineering, new business strategy design, PCCW might require managers with
different experience. Therefore, suggestions were made that Richard Li might
need to step into non-executive position and/or hire experienced managers to
handle various issues.
Economic and Corporate Governance
Like 111 any other Asian countries. Hong Kong has been long criticizing its economic and corporate governance. After the Asian financial crisis, as many Asian corporations collapsed due to ""crony capitalism" and •"agency problems", investors and general public in Hong Kong have shown intensifying concern about governance in the SAR. Many studies showed thai poor economic and corporate governance were attributed to the domination of the corporate sector by a few politically strongly bonded families. In Hong Kong�to p five families control 26% of the market capitalization, and 669r of the companies are controlled by families. The impact on economic policy by Ihc strong family-conlrollcci cconoiny could not be underrated. The most obvious one was that prcrercnlial Irealnicnls were given to family businesses, especially families that were controlling blue-chips companies. Impact was also placed on the development of legal and regulatory systems. If a small number of families dominate the corporate sector and the government is heavily involved in and influenced by business, then the legal system might not protect promote competition or protect minority shareholders. Studies showed that the concentration of corporate control has had a major negative impact on the evolution of the legal system. (Claessens, Djankov and Lang (2000))
In this case study, we could see some issues regarding economic and corporate governance happened in the merger of PCCW and C&W HKT, and related issues afterward.
/. Cyberport Project
The Hong Kong Cyberport project has revealed the notorious cronyism due to
the close connection between the SAR government and the ‘'families: The issue
represented poor economic governance - the granting by Government of a huge
property development to a single party without a tender. The decision was heavily
criticized by the general public and the major property developers in Hong Kong,
as the majority of the floor area of the Cyberport project would be used for
residential purpose. Should Cyberport project not offered to PCCW, Tricom (then
PCCW) may never have been transformed into PCCW as the injection of the
lucrative project would not happen. 36 2. Unnoticed Change in Accounting Methods
A change of accounting methods for the interim financial report ended 30 June
2000 described by analysts as a dressing-up exercise has seen PCCW report a
smaller than expected interim loss of HK$35 million. Analysts initially expected a net loss of up to HK$250 million. Provided that the two accounting changes were
stripped out, PCCW would have reported a yearly loss at HK$1.5 billion.
The first change in accounting was a re-classifying long-term holdings into
short-term investments. This could in fact capitalize a HK$562 million unrealized
investment gain, mainly from its 3.8% interest in Tom.com (an internet company
owned by Richard Li's father) and its holding in CMGI. What made it interesting
was that PCCW in March announced that such investments would be held for
'long-term strategic purposes'. It also said its policy was not 'to book unrealized
gains on investment securities'. The change in accounting policy in just a few
months was undoubtedly unfair to investors, especially minority shareholders,
who were not insider of the company.
PCCW also capitalized a US$ 130 million investment for developing Network
of the World (NOW), its convergence television and multimedia service.
3. Share Transaction With Hutchison Telecommunications Technology
Investments Ltd. (HTTIL)
On 22 February 2001, PCCW announced that the company has entered into
the Sale and Purchase Agreement with Hutchison Telecom, an indirect wholly
owned subsidiary of Hutchison which in turn was controlled by Mr. Li Ka Shing, 37 father of Richard Li. PCCW agreed to acquire all the issued share capital of
HTTIL and the shareholder's loan from Hutchison Telecom for a total consideration of HK$803.4 million. The consideration would be satisfied in full by issuance and allotment of shares in the company at the price of HK$4.375 per share, a discount of around 6.3% to average closing price on the 20 trading dates up to and including the date of announcement.
HTTIL, formerly known as Pacific Century Technology Investment Ltd., was originally owned by Pacific Century Group (PCG) and sold to the Hutchison
Group in 1995 for approximately HK$579.6m. Though PCCW claimed that the deal was made on an arm's length basis and acquiring HTTIL would enable
PCCW to offer a complete portfolio of solution by including HTTIL's satellite- based network solution, two issues were noted in this transaction.
First，insufficient information was disclosed to justify the price appreciation of
HK$223.8 million since PCG sold the business to Hutchison Telecom. Second.
The merger would definitely avoid direct competition between PCCW and HTTIL.
Before C&W HKT was acquired by PCCW, Hutchison Telecom (new entrant) had competed fiercely in almost every battlefield in the telecommunication industry with C&W HKT. This in fact promoted competition in the industry and enhanced the overall competitiveness of the industry participants.
4. Inaccurate Biography of Richard Li
In April 2001, a scandal regarding PCCW was uncovered and publicized
throughout the media. Richard Li, the president of PCCW, was found and later 38 admitted that he did not graduate from Stanford, contrary to claims previously made in PCCW biographies and the group web site. Although PCCW emphasized that the claim was not made "in public disclosures filed by the Company in accordance with applicable legal requirements". However, it was found that the degree claim has been made in both the US and Singapore in legal filings of documents for which Richard Li was responsible.
We believed that any statements made by a company, whether or not they are filed with regulators, should be made to the same standard of care, accuracy and truthfulness. To place this "emphasis" on legal filings as opposed to other
statements brings into question the importance the group attaches to its other public statements. In fact, the same "mistakes" happened in many occasions,
namely in various prospectus and filings to SEC and SFC. The scandal did not
only reflect the insufficient corporate governance but also the powerless
regulatory system in Hong Kong. So far, no action has been taken to deal with the
issue by any regulatory bodies in Hong Kong. APPENDIX I 39 Offer Announcement Announcement Date : 2000/2/11
nt T.- /CCW Beta HKT Beta PCCW Hang Seng Rhkt,. BetaHKrR., U^t Cum Uhkt, Rpccw, BetapccwR., Upccw.t Cum LWw.t Date Stock Price Stock Price index Return 2000/1/28 19.9 18.85 0.914 0.629 1.68% 二) ？。3, 0.915 0.634 -4.04% -5.03% -3.69% -1.33% -1.33% -2.65% -2.56% -0.09% -_% 18.9 18.8 0,916 0.636 0.78% 0.00% 0.72% -0.72% -2.05% 2.45% 0.50% 195% 186% 2000/2/2 19 18.75 0.915 0,64 0.87% 0.53% 0.80% -0.27% -2.31% -0.27% 0 56% -0.82% 104% 2000/2/3 18.15 19.3 0.911 0.641 1.13% -4.47% 1.03% -5.50% -7.81% 2.93% 0 72% 221% 325% 2000/2/4 18.15 19.3 0.91 0.645 0,00% 0.00% 0.00% 0.00% -7.81% 0,00% 0 00% 0 00% 3 25% 2000/2/7 18.15 19.3 0.909 0,646 0.00% 0.00% 0.00% 0.00% -7.81% 0,00% 0.00% 0 00% 3 25% 2000/2/8 17.35 21.5 0.903 0.657 1.63% -4.41% 1.47% -5,88% -13.70% 11.40% 107% 10 33% 13 58% 2000/2/9 16.85 22.05 0.887 0.658 3.64% -2.88% 3.23% -6,11% -19.81% 2 56% 2 40% 0 16% 13 74% 2000/2/10 17.65 23.4 0.888 0.663 0.15% 4.75% 0.14% 4.61% -15,19% 6.12% 0 10% 6 02% 19 76% 2000/2/11 21.65 24.65 0.931 0.669 3.18% 22.66% 2.96% 19.71% 4.51% 5.34% 2.13% 3.22% 22 98% 2000/2/14 26.4 24.65 0.91 0.675 -1.10% 21.94% -1.00% 22.94% 27.45% 0.00% -0 74% 0 74% 23 72% 2000/2/15 24.55 26.35 0.919 0.66 -2.91% -7.01% -2.68% -4.33% 23.12% 6.90% -192% 8 82% 32 54% 2000/2/16 23.95 25.35 0.912 0.663 2.13% -2.44% 1.94% -4.39% 18.74% -3,80% 1.41% -5.21% 27 33% 2000/2/17 25.45 25.8 0.912 0.66 -0.37% 6.26% -0.33% 6.60% 25.33% 1.78% -0.24% 2.02% 29.35% 2000/2/18 25.65 25.4 0.907 0,662 -2.25% 0.79% -2.04% 2.83% 28.16% -1.55% -1.49% -0.06% 29 29% 2000/2/21 25.55 24 0.907 0.689 -1.67% -0.39% -1.51% 1.12% 29.28% -5.51% -1.15% -4 36% 24 93% 2000/2/22 24.8 22.55 0.909 0.693 -0.41% -2.94% -0.37% -2.56% 26,72% -6.04% -0.29% -5.76% 19.17% 2000/2/23 23.8 21.05 0.908 0.698 0.75% -4.03% 0.68% -4.71% 22.01% -6.65% 0.52% -7,17% 12.00% 2000/2/24 25 21.8 0.911 0.698 4.16% 5.04% 3.79% 1.25% 23.26% 3.56% 2.91% 0.66% 12.65% 2000/2/25 25.9 22.15 0.913 0.698 0.83% 3.60% 0.76% 2.84% 26.10% 1.61% 0.58% 1.02% 13.68%
Agreement Announcement Agreement Date : 2000/2/28 HKT PCCW Beta HKT Beta PCCW Hang Seng Rhkt.i BetaHKiRm.t UHKT.t Cum Uhkt.i Rpccw,t BetapccwRm.t Upccw.t Cum Upccw.t Date Stock Price Stock Price Index Return 2000/2/14 26.4 24.65 0.91 0.675 -1.10% 2000/2/15 24.55 26.35 0,919 0.66 -2.91% -7.01% -2.68% -4.33% -4.33% 6.90% -1.92% 8.82% 8,82% 2000/2/16 23.95 25.35 0.912 0.663 2.13% -2.44% 1.94% -4.39% -8.72% -3.80% 1.41 % -5.21% 3.61% 2000/2/17 25.45 25.8 0.912 0.66 -0.37% 6.26% -0.33% 6.60% -2.12% 1.78% -0.24% 2.02% 5.63% 2000/2/18 25.65 25.4 0.907 0.662 -2.25% 0.79% -2.04% 2.83% 0.71% ,1.55% -1.49% -0.06% 5.57% 2000/2/21 25.55 24 0.907 0.689 -1.67% -0.39% -1.51% 1.12% 1.83% -5.51% -1.15% -4.36% 1.21% 2000/2/22 24.8 22.55 0.909 0,693 -0,41% -2,94% -0.37% -2,56% -0.73% -6.04% -0,29% -5.76% -4.55% 2000/2/23 23.8 21.05 0.908 0,698 0.75% -4.03% 0.68% -4.71% -5.44% -6.65% 0.52% -7.17% -11.73% 2000/2/24 25 21.8 0.911 0.698 4.16% 5.04% 3.79% 1.25% -4.19% 3.56% 2.91% 0.66% -11.07% 2000/2/25 25,9 22.15 0.913 0.698 0.83% 3.60% 0.76% 2.84% -1.36% 1.61% 0.58% 1.02% -10.05% 2000/2/28 25.95 22.15 0.91 0.729 -1.26% 0.19% -1.15% 1.34% -0.02% 0.00% -0.92% 0.92% -9.13% 2000/2/29 25.95 22.15 0.91 0.728 1.09% 0.00% 0.99% -0.99% -1.01% 0.00% 0.79% -0.79% -9.92% 2000/3/1 22.75 20,4 0.932 0.745 -1.90% -12.33% -1.77% -10.56% -11.57% -7.90% -1.41% -6.49% -16.41% 2000/3/2 22.25 20.7 0.937 0.75 0.55% -2.20% 0.52% -2.72% -14.29% 1.47% 0.41 % 1.06% -15.35% 2000/3/3 23.7 21.9 0.957 0.788 2.06% 6.52% 1.97% 4.55% -9.74% 5.80% 1.62% 4.18% -11.17% 2000/3/6 24.8 23.35 0.969 0.928 2.74% 4.64% 2.65% 1.99% -7.75% 6.62% 2.54% 4.08% -7.10% 2000/3/7 25.6 24.3 0.97 0.929 0.60% 3.23% 0.58% 2.64% -5.11% 4.07% 0.56% 3.51% -3.58% 2000/3/8 25.45 23.85 0.966 0.891 0.48% -0.59% 0.47% -1.05% -6.16% -1.85% 0.43% -2.28% -5.87% 2000/3/9 24.55 22,95 0.97 0.866 -1,75% -3.54% -1.70% -1.84% -8.00% -3.77% -1.52% -2.26% -8.12% 2000/3/10 23.9 22.15 0.985 0.84 1.11% -2.65% 1.09% -3.74% -11.73% -3.49% 0.93% -4.41% -12.54% 2000/3/13 22.65 20.7 0.99 0.863 -4.12% -5.23% -4.08% -1.15% -12.88% -6.55% -3.56% -2.99% -15.53% APPENDIX II Stock Price Movement Before and After Offer Announcement on 2000/2/11
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A ： ： :、：、、、’： C . :、;;:,：. • n nrw ,,•…界芝乂'��" '；•：：：'：-,：,r 1：--……,；……：,•,„•,j ：…,,J…,….„,,,：„ …,. …：„ A • - , ,/ • j „, , d,�, v , 这 yj.uyj/c； 醒 ^ ^^ \ \ \ / \ '',…：：‘"々彻 2000/1/31 r20(X)/2/rl2()00/2/2^^;2000/2/3^i-2()00/2MH2000/2/7M^ -^2000/2/10-2000/2/11 2000/2/14 2000/2/15 2000/2/16^2000/2/17 2000/2/18^2000/2/21 2000/2/22 2000/2/23,,2000/2/24,2000/2/25 -10 00% ： “ Date ‘ —Abnormal Return for PCCW Cumulativ— e Abnormal Return for PCCW APPENDIX Vn Abnormal Return for PCCW Before and After Agreement Announcement on 2000/2/28 __•瞧______1圖____1_圓1__讓^^ 5 00% — � nrvw 厂 IV / \ u.uu% / ；^丨丨•丨：‘ 丨•,111 ‘ J 丨 丨圓即，丨 / _ >III删__1_ \iiiiiiiiiii, — 2000/2/15 2000/2/16 200^/17 2000/2/18 2000/2/21 2000/2/222000/2/23.2000/2/24 2000/2/25 2000/2/28 2000/2/29 2000/3/1 2000/3/2 2000/3/3 2000/3/6 2000/3/7 20^/3/8^2000/3/9 2000/3/10 2000/3/13 / f V\ f Z \ 2 ^^ z g 國III"�-:r4 ；-j： h,;-- iwy ---- ~ >V� \:\、；-、 / • I -5.00% -.：：--：•；：� ：： \ / ‘ ^ ^ 、-脚、、；、 、>:、、：、： 、、、、、、、、：、；： ” \、、、、\、 、、\ 、、专\、 、、 、、\ ：；、：、、、、、- ‘、、、、、々、、、、、-、\\ / 、、- y X 1 A (W 、‘-广、:、？.,>、：:、, 人t「“<-:,々；：、.,/ \/ 、’ ’ \ -丄U.LMJ/0 、:-..、...... ….、.…、..、.、.、、.、.…...... 、.、.:、、:、、...... 、.-：：.....r：-：''7 - T"r - ^^^ ""丨'“："丨"“‘""丨” V ： �人�：：�、：:yr：�：�； -S��、、 -�：。;；、:： ： ；^ >少� r\,1�； . �： ：、、/。：、. ： ： fc^ …� / ： V . 、、 � � 、、、、、、、�“、：： ：》^ 、、、、、、、、、、、、、:、、、� �« ����-…��� J�\、、、《、、、、、、、、、、、、、、、；、、、、、、、������� 、专 ���� >、：���������������� ���� ��������$ 5、、：：、、& ��� “ �f��V 、 、、、 、、、-'、、、 、、、、、 、、 \ f � “.：： :、A;:: ？<-v���、： > = - / ^：、、； ” ^ ： ： ：； ；; - \ \、、二 广：：、：：：--、；：、/、 ^^ IS00% 。："、卜：、-、〉、、：〔 .…��；,- ：-^ iiiiiiiiiiiiiiiiiii»iiiili« ______讓 ___1____圓 iwmmmmmm^mmm^^^m 籠___ 國 ^^ _：_liiiiliifMiiWIi^ -20.00% ^ — ^ … 心 Date —Abnormal Return for HKT —^ Cumulative Abnormal Return for HKT APPENDIX Vn Abnormal Return for PCCW Before and After Agreement Announcement on 2000/2/28 15.00% r 、-,\ -；••-•-； ‘— —•—•—‘-———1 缀缀錢凝釋發觀缀箱務蹈缓滋獲駭錄麗兹ii縫錢丨縫箱發：耗翁：；矮缀珍毅發 ‘ iill|:|ii|:|;pli;iiii:^ii|i;iili 、.： • 囊_____::___丨 S__:雖_：驅::丨::::丨:":____麵^^ .. 10.00% ： — ： ：、:「:::/、::•::,•丨 , •• 齒. ,, , � 、\/ S 、"•-、、r、、 ：- 、\ ：、、、、、、\V 、、 K、：； 、 — Ill* ； . ；；：^:：：；:：：：!：：；；：：：：;:：；;：：；* ^ \\ •'麵、 �� ~‘ • ‘ .V -广、、…： 1, \ ra 丨丨 III tH 、： 认、 5 00% \ \ 二 ： - \ 、 - -： -、‘：‘.、. 0 00% …� \/ ‘ . * 广•本"二]、 、、二(：： � ；‘ , _____V______,,, -5.00% ‘、、乂…、：）；：？錢,、>::? ; ；； 、： V �-： ：， —— ：\ ‘ 二、^^ \ ： / ‘ 1 C C\r\G7 „„MMm.mMimi.n.iMM.iinini.u.in.M.mMiim•…_,mi.mi.mnn^i^hm^.iM.m,.iiimm,,,mm,,..,,,1111,1 i,ii,i,,.i,i.ihiim：,,,,,,,,,,,,,?.,,.山“ ；„.:【…:,,,,,,,,“, ： ：\ / . . , ,_.... , , — — ]).⑷/o ‘ ： ；' ‘ ：/；, • ^ • ； ：\ ； ^ ^ ；” ； V 一. ..."—— liiiiiliiiiiiliiiiiiliiiifilii^ t -,:::」:::；.“... lilliilB ：； 卜V ： -20.00% ^ — Date —Abnormal Return for PCCW Cumulative Abnormal Return for PCCW 46 BIBLIOGRAPHY Reports Annual Report. Cable & Wireless HKT Limited. 1999. Annual Report. Pacific Century CyberWorks Limited. 1999 & 2000. Company Announcements Letter From The Board Of C&W HKT. Recommended Offer For Cable & Wirdess HKT Limited To Be Acquired By Pacific Century CyberWorks Limited hy Way Of A Scheme Of Arrangement. 26 May 2000 Letter From The Board Of PCCW. Proposal For The Acquisition Ry Doncaster Group Limited. An Indirect Wholly-Owned Subsidiary Of Pacific Century CyberWorks Limited Of The Entire Issued Share Capital Of Cahle & Wireless HKT Tjmited - Major Transaction. 26 May 2001 Periodicals Christopher W. Runckel. An Interview with Richard Li. Chairman and Chief Executive of Pacific Century Holdings Limited. Hong Kong. Runckel & Associates. December, 1999 Does Singapore need a Richard Li? Business Times (Singapore). 2000 Yulanda Chung (Hong Kong) and Assif Shameen (Singapore). Coming of Age: Hong Kong's Most Successful Internet Company Wins Control Of Telecom Giant Cable & Wireless HKT. Now What? (2000) Books Larry H.P. Lang. Cases of Mergers and Acquisitions in Hong Kong. Pearson Education Asia Pte Ltd. Prentice Hall. (2000) Firth, Michael Arthur. Share Prices And Mergers: A Study Of Stock Market Efficiency. Westmead, Eng. : Saxon House ； Lexington, Mass. : Lexington Books (1976) 47 Thomas M. Gmbb, Robert B. Lamb. Capitalize On Merger Chaos : Six Ways To Profit From Your Competitors' Consolidation And Your Own. New York, N.Y. : Free Press. (c2000) Nancy Hubbard. Acquisition Strategy And Implementation. West Lafayette, Ind.: Ichor Business Books. (1999) Bean, David Geoffrey. Financial strategy in the acquisition decision / [by] D. G. Bean. Epping: Gower Press. (1975) CUHK Libraries •圓 l_lllll ODBflEtOTb