Republished with permission from Governance for Stakeholders.
Mak Yuen Teen is Associate Professor of Accounting and former Vice Dean (Finance and Administration) at the NUS Business School, National University of Singapore. He is also former Director of the Corporate Governance and Financial Reporting Centre at the NUS Business School, which he founded in January 2003.
Nothing Good Looking About Datapulse’s Diversification Plan
A/Prof Mak Yuen Teen of the NUS Business School.On April 20, Datapulse shareholders will vote on the proposed removal of the four current directors, the proposed appointment of four new directors, a (not so) “special dividend” of 1 cent and the proposed diversification into the consumer and investment businesses. The company had in March 2013 already obtained shareholders’ approval to diversify into the property business.
Datapulse’s previous foray into property development ended faster than most Hollywood relationships and is a source of controversy, which I have discussed in some previous articles. It had bought a 20 per cent stake in a Lian Beng company called Goldprime Realty for S$20 and extended to it a S$2.9 million unsecured interest-free shareholders’ loan, and then sold it 16 months later for S$35,000 to KSH, another SGX-listed company. A mere five months after Datapulse sold its Goldprime stake, KSH announced that Goldprime was selling a property in Melbourne for A$34 million and that “the proposed disposal is expected to have positive impact on the net earnings and net tangible assets of KSH”. One might therefore also ask whether the then Datapulse board had carefully considered the sale of Goldprime to KSH.
The Lian Beng connection was also contentious because Lian Beng bought about 10 percent of Datapulse shares at a 10 percent discount in June 2015 and, just over a year later, sold its entire stake to Ng Cheow Chye, the former Datapulse CEO and controlling shareholder, at a more than 50 per cent premium. Mr Ng in turn recently sold his entire stake to Ms Ng Siew Hong, the current Datapulse controlling shareholder, also at a more than 50 per cent premium.
Everybody’s into property
Many SGX-listed companies have sought shareholder approval to diversify into the property business over the past few years. Some examples include Casa, Chasen, CSC, GRP, Progen and PSL. These exclude companies that are stealthily diversifying into it but pretending they are not, and those that are pretending to diversify into it to get shareholders excited.
It seems that diversification into the property business is often seen as a panacea. However, like getting into any business, there is the matter of whether the board and management have the necessary expertise and the company is able to muster the resources to execute it successfully. If shareholders want to invest in property, they may be better served investing in established property companies with boards and management having significant expertise and experience and the financial muscle to do it well. It is not clear what competitive advantage Datapulse has in the property business and why it should not be returning cash to shareholders to invest in property companies themselves should they choose to. What may seem like a good idea in 2013 may no longer be the case.
More risk of conflicts
With more companies getting into the property business, there will also be more potential for conflicts of interest for independent directors who sit on boards of different companies. In fact, when Datapulse sought shareholder approval to diversify into property in 2013, the circular disclosed potential conflict of interest involving one of the then independent directors who also served as an independent director in another SGX-listed company in the property development business. The circular assured shareholders that the director will fully disclose actual and potential conflicts and will not participate in discussions at the committee and board level where such conflicts exist.
When Datapulse disposed its Goldprime stake to KSH in February 2017, one of the KSH independent directors was conflicted because he sat on the board of Lian Beng. If Datapulse now diversifies into property, Low Beng Tin, the Datapulse chairman, will face potential conflicts as he is also an independent director of Lian Beng. Since he has had a number of “inadvertent omissions” in disclosures, one can only hope that he does not “inadvertently omit” to disclose and recuse himself where necessary.
Using shareholders’ money to play the stock market?
Let me now turn to the proposed diversification into the investment business. This idea is even worse as it will involve investing and trading in publicly-listed securities and instruments, including equities, funds and debentures. Why do shareholders need the company to do this, when they can easily do it themselves?
The board claims that 37 year-old independent director Rainer Teo, with his experience in investment management and fund-raising, will be able to provide invaluable advice to the board for the investment business. There is extensive research that shows that it is extremely difficult for even “star” fund managers to consistently outperform benchmarks such as market indices. The Datapulse board should not be delusional about its investment expertise.
Bad hair business
Finally, we have the diversification into the consumer business – which has already started with the acquisition of Wayco Manufacturing (Wayco) in December 2017. This acquisition, undertaken with minimal due diligence, was first announced the day after the current board was formed. Wayco is a Malaysian company in the hair care business, which was owned by Way Company, which is in turn owned by Ang Kong Meng. Mr Ang and Ng Siew Hong have significant business relationships. By now, those who have been following the saga would be familiar with why this acquisition is highly questionable.
However, there are other issues. On December 15, Datapulse announced that the S$3.5 million consideration was based on: (a) the market value of the properties; (b) the “future earnings potential of the Target Company, inter alia, in view of certain intangible assets which it holds or owns, including trademarks, product formulations and distribution networks;” and (c) the “potential residual value of certain plant, machinery and equipment…which are almost fully depreciated”.
It was queried by SGX about the announcement and one of the queries asked the company to “provide details of the intangible assets and how they are instrumental to the future earnings potential of the Target Company”. Its response on December 28 said: “The intangible assets that the Target Company owns are mainly the product formulations or specifications for its products, which are unique or proprietary to the Target Company, and the trademarks set out in Annex B. All of the trademarks set out in Annex B are registered and relate to the Hair Care Products and Household Products manufactured by the Target Company, including trademarks to well-known brands such as “Good Look”.
Annex B then listed 19 trademarks with no further information.
In the circular for the coming EGM, Appendix E provides further information on the 19 trademarks owned by Wayco. It turns out that only four of the 19 trademarks are in use. Fourteen of the trademarks will expire by November or December this year. The 15 trademarks that are not in use would suggest that they are not currently contributing to the business of Wayco. Since many of the trademarks that are not in use are also expiring, one would question whether they have ever been used at all and are of any value.
Was the board’s response to the SGX query on December 28 fair and balanced when it merely listed the 19 trademarks and when it claimed that the trademarks will contribute to the “future earnings potential” of Wayco, given that 15 out of the 19 are actually not in use?
Not looking good
But that’s not all. Two of the four trademarks listed as being in use are “Goodlook Leaf Logo” and “GOODLOOK “Leaf” Logo”. Recently, I happened to be at a neighbourhood departmental store and came across a number of “Goodlook” products. Their product labels state: “GoodLook Leaf is a registered trade mark of Wayco Research (UK) Ltd.”. They further say: “Under license of Wayco Research (UK) Ltd”, “Manufacturer: Wayco Mfg (M) Sdn Bhd, Malaysia” and “Manufactured for Way Company Pte Ltd”.
There is no mention of Wayco Research in the circular or any Datapulse announcements. The product labels seem to contradict the circular and announcements which indicate that Wayco owns the “Goodlook Leaf” trademark in Malaysia.
According to the UK Companies House, Wayco Research (UK) is a private limited company incorporated in UK in 1988 and has been dormant since its incorporation. It has two shareholders, Ang Kong Meng and Ang Ai Chim. Ang Ai Chim is Mr Ang’s sister.
Mr Ang was a director of Wayco Research until he resigned in February this year, leaving his sister as the sole director. The balance sheets available for every financial year since incorporation show that Wayco Research has paid-up capital of £100 and assets of £100, comprising of cash in the bank (except for a couple of years, when the paid-up capital and assets went down temporarily to £2).
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The above information raises a number of issues, including:
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The circular also mentioned the “Glorin” series of hair care and home care products and that the “Glorin” trademark is owned by Way Trading, which the board is also considering acquiring. Again, the product labels say that they are manufactured by Wayco under license. However, this time, they state that the license is owned by “The London Dispensary Co. Ltd. England.”. This company is very much like Wayco Research. It was incorporated in 1997 in UK, had been dormant since its incorporation, had the two Ang’s as shareholders, had Mr Ang resigning as director in February 2017, and had £100 paid-up capital and £100 of debtors or cash throughout most of its history.
Again, the same issues I have raised above are relevant. This also raises questions about the other trademarks.
These are important issues but even putting them aside, the reality is that information from the Ernst & Young strategic review presented at the SIAS dialogue session shows that buying the Way group of companies will do little to help Datapulse to diversify. The market is dominated by multinational giants and the numbers suggest that the brands that Datapulse will “own” will only contribute about S$3.6 million in annual revenues by 2021, assuming that market shares remain constant.
In summary, all aspects of the proposed diversification plan are questionable. I reiterate my call to minority shareholders to support the requisitioning shareholders and vote to remove all the current directors and stop the poorly-conceived diversification plan. Otherwise, they may have to watch as shareholder value is destroyed.
They should vote in the proposed directors, who can then do a proper study before a proper diversification plan is put to shareholders for approval (or cash is returned to shareholders). The new board can also review whether issues about the trademarks and other matters would constitute “irregularities, deficiencies or material adverse events” that would trigger the buyback clause requiring the vendor to buy back Wayco. I believe that unwinding the Wayco acquisition would be in the best interest of the company.
On 16 April, Datapulse issued a rejoinder on the SGX website to Prof Mak's articles. Click here.
