Diamonds Buried in The Rubble

By GEORGE J. CHURCH

Psst! Want to expand overseas--cheap? Well, Mr. or Ms. American Executive, have we got a deal for you! How about a plant to make vans in Thailand? Or perhaps a piece of a debt-burdened South Korean electronics firm? Or some Japanese real estate, seized by banks as collateral on defaulted loans? Hurry, hurry! These deals may not last!

Believe it or not, many Asians are making exactly those pitches right now--in more muted terms, to be sure--to U.S. executives and investors. Still more surprising, some of the prospective buyers are beginning to listen. They include a few who only weeks ago would have replied with some more polite variation of "Bug off! Do you think I'm crazy?"

Many, perhaps most, U.S. executives would still give that response. In their mind, the risks of investing in Asian economies that are still struggling to recover from a region-wide financial collapse far outweigh the bargain-basement prices now available. The deep recession in much of Asia looks likely to last through at least another year, then give way only to a very gradual recovery. That's at best; at worst, the recessionary cycle might still take one or more additional downward twists.

Signs are emerging, however, that the slump may be nearing bottom, or at least slowing. By the end of last month, stock prices in Hong Kong, Thailand, Malaysia and South Korea, while still far below their peaks, had bounced up 50% or more from their deflated lows of summer. The Japanese government has announced yet another economic-stimulus program, and optimists hope this one might actually be carried out. Meanwhile, a timely international rescue plan for Brazil has eased fears that Asia's ills would spread inexorably to Latin America, then to the U.S., then Europe, back to Asia and on and on in widening global circles. Accordingly, a few U.S. business people are beginning to cast lines into economies that are still largely underwater and fish for bargains on the bottom.

In late summer last year "we told our clients, 'Take all your money out of Asia. Sell short,'" recalls Allen Sinai, chief global economist of Primark Decision Economics, a forecasting and consulting firm. In its worldwide model portfolio, it left only 5% for Japan. Says Sinai: "We doubled the allocation to Japan two months ago and put allocations back into South Korea, Hong Kong, Thailand and Singapore." Though many economists are dubious about how soon and how strongly Japan can recover from a long period of stagnation and now recession, Sinai pronounces himself "somewhat positive" on the outlook, at least for financial markets, which tend to improve before economies do.

General Motors is also sticking its corporate toes back in the water. Last year the automaker had to halt construction of a plant in Thailand that was to produce a sort of upmarket Opel, mostly for export to other Asian countries. "Frankly, the market disappeared for that car," says chairman John Smith. But now GM is reviving--though also downsizing--its plans. Instead of 100,000 midsize cars a year, it intends to produce 40,000 seven-seat multipurpose vans annually. GM has also concluded what Smith calls "a strategic agreement" with Japan's Suzuki to "work together in the lower end of the car market," and is looking at joint projects it could undertake with Daewoo of South Korea.

GM is continuing to build a plant in China, but Smith notes that in other countries the economics no longer favor constructing new American-owned factories. "Today," he says, "there is available capacity that you can buy, or possibly you can acquire a company or merge." Other U.S. companies agree, though they are following different strategies.

Some firms already active in Asia through joint ventures are buying out their cash-strapped local partners, thus positioning themselves to reap all the profits from a future upturn. In South Korea, Coca-Cola has taken over the bottling and distribution businesses of three former partners--Doosan Beverage, Woo Sung Food and Honam Food--and it is no secret that Coors is negotiating to take full control of Jinro Coors Beer. South Korea is one of a tiny handful of troubled Asian countries expected to resume some positive growth, however small, by late 1999.

Other U.S. firms are trying to enter or expand in Asia by forming new joint ventures or buying pieces of debt-burdened local companies. Motorola, for instance, has recently acquired 51% of South Korea's Appeal Telecom. That strengthens its competitive position against giant Samsung.

ITT, the once monster conglomerate that has been rapidly deconglomerating, has saved for future acquisitions some $1.6 billion earned by selling off two global automotive businesses this year. "A fair amount of that," says chairman Travis Engen, "will go to Asia. Much of the world's electronics is being produced there, and our footprint there in electrical connectors is rather modest. So that is an area where we would specifically like to make great investments in acquisitions." Asia supplies about 5% of ITT's global revenues, but Engen foresees that rising to a third in about 15 years--or in less time, if the company can make profitable acquisitions fast.

For small to medium-size U.S. companies that want to get into Asia, joint ventures with comparable local firms are the way to go, say many experts. "There are really a lot of bargains available," says David Emery, Dun & Bradstreet's managing director for Southeast Asia. He cites one example of a Swiss company that bought a large share of a major Thai Internet provider at roughly half what it would have had to pay only a little earlier.

Emery is far from the only specialist who thinks European executives have been faster than Americans to snap up such opportunities. But the Americans are about to get some help in spotting the good buys. Goldman Sachs has set up a new mergers- and-acquisitions team in Singapore to be headed by Richard Gnodde, one of its top specialists. Jon Corzine, co-chairman of Goldman Sachs, adds that the firm is planning to start a "recovery fund" targeted chiefly at Asia. Goldman's Asia president, Philip Murphy, indicates a major target will be consumer goods, which many others also consider an attractive field for U.S. investment. One reason is that some Asian companies are reorganizing their countries' chaotic distribution systems, replacing mom-and-pop stores with modern networks of warehouses and big retail outlets, but need outside cash to finish the job.

For the most adventurous investors, some advisers recommend buying land and buildings whose former owners went bankrupt. Don't laugh. In many Asian countries, one of the worst economic problems is a banking system groaning under a mountain of uncollectible loans, many made to borrowers who had put up real estate as collateral. Banks would be delighted to hand over the land and buildings to U.S. or other investors who would pay off those loans or part of them. The banks could clear some red ink off their books, and the investors could take over property at a deep discount--in Korea, 30% to 50% below stated collateral value. In Japan, where investors can buy property at 80% to 90% below the stated collateral value, Goldman Sachs, Morgan Stanley Dean Witter and others are said to have sunk billions into foreclosed real estate.

In markets other than Japanese real estate, however, bottom feeders may find some of the best bargains already gone. In September "we recommended South Korea and Thailand [to stock-market investors], but they have moved up so fast that I'd be cautious now," says Jeff Bahrenberg, chief global strategist for Merrill Lynch. "We are skeptical that the strong rebound can be sustained."

U.S. firms face fierce competition from European or even other Asian buyers for the potential business bargains that are left. Hong Kong's Cathay Pacific airline, for one, has been involved in a turbulent bidding war against the U.S.'s Northwest Airlines to take over bankrupt Philippine Airlines.

And competition isn't the only problem. Though most Asian businessmen, bankers and government officials recognize only too well their desperate need for foreign capital, U.S. investors still encounter some cultural resistance. Says Nicholas E. Benes, president of Japan Transaction Partners, a mergers and acquisitions boutique: "The Japanese word for mergers and acquisitions is miuri, and that means selling your own body. It implies prostitution--the last thing you do before you die." That stigma, oddly, can sometimes work in a foreign buyer's favor: Japanese buyers will often try to take advantage of what they perceive as the degradation of a firm up for sale and offer an extra-low price while attaching onerous conditions to any deal. But Japanese business owners prefer not to sell to anybody, foreign or domestic, and many go bankrupt.

Elsewhere in Asia, specialists say, it is often the Americans who hold out for an absolute rock-bottom price and lose out on some attractive opportunities by doing so. A Singapore-based mergers and acquisitions consultant tells of being sent to Thailand to negotiate on behalf of an American venture-capital fund for a majority interest in a Thai company. The owner had invested $80 million in the local firm only three years earlier, but he was willing to sell a 70% interest for about $30 million. The American offer: $14.5 million, take it or leave it. Says the Singaporean: "The Thai tycoon flipped his lid when I gave him that figure. When I left, my hands were trembling. It was after 6 p.m., and there was an armed guard outside the door. I could have been thrown out the 21st-floor window." He got out alive but with no deal.

Buying purely on the basis of price is a mistake in any case, say investment advisers. For one thing, the lowest price often betokens the greatest risk. In Indonesia, U.S.-based Newbridge Asia picked up for $90 million a microchip plant on the island of Batam that had been valued at $150 million before the Indonesian rupiah began to plunge in July 1997. Other U.S. investors have shied away from the archipelago, however, and with good reason. Indonesia is still in a deep slump and beset by political and social turbulence that has occasionally broken out in bloody riots.

Even in less besieged countries, risks are great enough to make experts caution would-be investors not to look for quick profits, however low the price. The payoff, if any, could be years in coming. Nearly all Asian countries will have to restructure their rickety banking systems before they can get out of the credit squeeze that is holding back growth, and that will be a long, painstaking job.

Nor is success assured. Thailand, which led Asia into financial crisis in 1997, is now judged likely to lead the recovery. But Banthoon Lamsam, president of the Thai Bankers Association, warns that it could instead suffer another currency collapse if parliament continues to dawdle in passing new bankruptcy and foreclosure laws. Says Lamsam: "Everything is going well, but the pig truck could overturn at the last curve."

For less venturesome investors who nonetheless want to include some foreign holdings in their portfolios, advisers think they can spot some intriguing buys. Julia Liu, president of Sentry Oak LLC, a global emerging-markets fund, expects a general rebound in some international securities by the end of 1999, largely because of a worldwide easing of credit led by the U.S. Federal Reserve. Besides South Korea, she recommends Poland ("an excellent job of reforming its economy") and Mexico ("It has shown great financial discipline at a difficult time").

Despite nagging questions about Brazil, U.S. investors are showing increasing interest in Latin America. In November, Argentina managed to float $1 billion worth of bonds on Wall Street, and Pemex, Mexico's government-owned oil company, raised $600 million. Since August, when Russia skipped payments to foreign bondholders, the market for any foreign debt issues had been stone dead.

Russia itself remains beyond the pale for American investors. Says Steven Halliwell, ceo and co-founder of River Capital International: "There is $10 billion trapped in that country, and no plan has emerged to get the money out." But U.S. executives and investors apparently realize that other nations are not all potential Russias. True, investing in other emerging markets, especially in Asia, does entail a high degree of risk for an uncertain reward--just as an angler fishing the bottom will often snag his rig on a rock and lose hook, line and sinker. But then, the catch reeled up from down there can be exceptionally tasty.

--Reported by Edward Barnes/New York, Kim Gooi/Bangkok, Stella Kim/Seoul, Sachiko Sakamaki/Tokyo and Ravi Velloor/Singapore

With reporting by Edward Barnes/New York, Kim Gooi/Bangkok, Stella Kim/Seoul, Sachiko Sakamaki/Tokyo and Ravi Velloor/Singapore