Central plans B16bn outlay

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Central Group of Companies says it will invest 16 billion baht this year in a vote of confidence in the country's economic recovery.

The investment budget this year is slightly higher than the 15.5 billion baht spent year, said Sudhitham Chirathivat, the executive chairman of the group's CEO management board.

Of the total this year, about 90% would be spent locally and the balance overseas. Sources of funds will come from its cashflow and bank loans.

About 5 billion baht will go toward Central Retail Corporation (CRC), mostly for new projects of Robinson Department Store in Trang and Chiang Rai and ongoing projects of Robinson Khon Kaen and another outlet plus renovations to outlets of all CRC business units.


Tos Chirathivat, the CEO of CRC, said the company would sign three or four agreements for its retail outlets in China. Each requires an investment of 500-600 million baht.

Another 8.9 billion baht will be invested by Central Pattana in new projects such as the Central Festival Pattaya Beach Hotel, which is expected to open in the third quarter of 2010; the shopping projects in Chiang Rai and on Rama IX Road (Bangkok), as well as a major renovation of CentralPlaza Lat Phrao.

Central Trading & Marketing (CMG) will invest 200 million baht while 1.6 billion baht and 300 million baht will go to Central Hotels and Resorts and Central Restaurant Group respectively.

Mr Sudhitham said the group's long-term business strategy was to focus on branding as a key strength, create values for business, seek strategic alliances in both the public and private sectors, prepare business plans that suit the circumstances and established objectives.

"Apart from our own developments, we will expand our business in 2010 through mergers and acquisitions as well," he said.

Mergers and acquisitions are a key strategy that will help drive growth and success for the group, Mr Sudhitham said, adding that the group expected to seal one or two business deals by the end of this year. He did not disclose any detail of the projects, saying only that the value of each deal was about 10 billion baht.Another strategy is to expand business overseas with the main focus on the populous and fast-growing China, which shares similar cultures and customs.

Sales of Central Group in 2010 are forecast to grow by 7% to 118.8 billion baht. In 2009, its sales stood at 110.7 billion baht with net profit of 6 billion baht. Its sales increased 9% from 2008 but 1.6% lower than the target set at 112.5 billion baht due to the global economic crisis and domestic political instability.

Late last year, the group's executive committee was restructured and transformed into the newly created CEO Management Board (CMB), which comprises CEOs from the younger generation in five core business units.

The CMB comprises Mr Sudhitham as executive chairman and seven other executive directors: Tos Chirathivat (CEO of retail business), Kobchai Chirathivat (CEO of real estate), Pichai Chirathivat (CEO of trading and marketing), Gerd Steeb (CEO of hotels), Thiradej Chirathivat (CEO of food), Suthilaksh Chirathivat (CEO of the group's land bank) and Prin Chirathivat (CFO for financial management).

MBA IDEAS

• Benefits of a Merger
  
  Synergy is a common word associated with M&As. Synergy or synergistic effects can be represented by a simple arithmetic equation of 1+1 = 3. This translates into the increase in combined shareholder value over and above the sum of the two original companies' shareholding values.
  
  The materialisation of synergy, however, can be curbed by intangible factors that challenge the benefits of M&As. They are discussed in the following points:
  
  Streamlining of human capital resources
  
  An M&A facilitates the streamlining of the cream of the crop. When companies merge, major changes occur in corporate culture, management styles, business direction, and key operating procedures. Only those who are flexible and adaptable to changes would be elected to stay on in the new company. This gives opportunity for human capital to be streamlined and for top management to keep those who are most competent and valuable to the company.
  
  Unfortunately, power struggles and political clans also exist; this hinders the streamlining process. These simple human factors can misrepresent the selection of candidates that should be retained in the new company.
  
  There are other factors that curb the synergistic effects of streamlining human capital. It is not suprising to see a fair amount of demotivation amongst retained employees. This can be due to them losing their displaced colleagues. Blending in two different corporate families with different corporate cultures can also be a stressful phase, especially when new alliances are formed and acclimatisation takes a longer time. New hierarchial structures can also cause resentment, especially if certain personnel are sidelined from long-awaited promotions. Reporting lines can change drastically leaving new working teams with newer learning curves altogether.
  
  The acquiring of the most effective technology
  
  Advancements in technology systems nearly always guarantee synergy. Companies that acquire technology-focus firms that are relevant to their business application can develop a competitive edge. Similarly, new technology can lead to aggressive product development and cost reduction.
  
  Again however, there are several factors that can curb synergy. There is a cost involved of training and transferring technical know-how to amateur members of the new company. Training takes time and space, which inevitably leads to cost. Coupled with resistance to changes, some employees (who use older systems) may want to revert back to former ways, just to accentuate their importance and expertise in the company. Another disadvantage may be the risk of reliance on self-developed technology. Unless the technology team is able to operate aggressively in the market and respond to competition as if they were an individual company, maintaining in-house developed technology can lead to saturated development. Sometimes, companies receive better support systems and services when they outsource from technology-focused service providers.
  
  Increase in market dominance and growth opportunities
  
  Synergy also materialises through increased market share and growth opportunities. Merged companies experience an increase in market share. The M&A between Reebok and Adidas in early 2006 is now a major threat to Nike's market leadership. Merged firms have also the opportunity to raise more capital as a larger and more cost efficient firm.
  
  In some cases however, a merger also changes the perception of the company, especially when different brands are added to the product lines. Some mergers may have negative or confusing effects on consumer perception when a change of products and services fail to retain their interests.
  
  Economies of scale
  
  Economies of scale can also be achieved through mergers. New technology can wipe out manual work. A merged company has better bargaining power with suppliers. More work can be done in-house, such as advertising. All these changes lead to cost reduction. Sime Darby immediately announced a 10% growth rate in 2008, after the merger was completed illustrating their confidence in their market leadership in terms of size.
  
  In general, size does matter, and size does bring in lower cost figures. However, mergers that are classified as conglomerations, where two different business-natured companies merge, economies of scales can not always be achieved, especially if the merger is not managed adequately. This is because, essentially, with two or more different business focuses, cost centres may not be consolidated as effectively as any one of the other forms of M&As. The different focuses and ideals may require separate cost elements to sustain the different business models.
  
  Similarly, companies engaging in an M&A can not expect immediate economies of scales. Compensation packages from downsizing, time allocation for new training programmes, new branding and marketing schemes, are all major expenditures at the inception and the short-run following the M&A.