Rebuilding Ailing Asia One Company at a Time

The wine is flowing, opera is playing and Ta-Lin Hsu is happy. Not because he is cruising blue waters off Thailand in a 120-foot rented yacht. And certainly not because he is relaxed.

Hsu is smiling because here, amid a lush tropical paradise worthy of a Gauguin painting, he has found an American willing to part with some blue-chip Malaysian stocks at a steep discount.

Never mind that just a few hours earlier, Hsu, founder of one of Asia’s few venture capital funds, had dismissed troubled Malaysia as an unstable place to put money given the government’s penchant for currency controls and strong-arm rule.

“At the right price, I would invest in Malaysia’s leading companies because I know they’ll come back,” whispered Hsu, the chairman of San Francisco-based H&Q; Asia Pacific, out of earshot of the half-dozen investors he was treating to a day of sun and snorkeling.

At a time when Asia’s troubled economies are still off the radar for most foreign investors, Hsu is leading the charge back in, logging enough air miles to circle the globe 200 times.

Since the collapse of Thailand’s currency in July 1997, H&Q; Asia Pacific--partially owned by investment bank Hambrecht & Quist, also based in San Francisco--has organized the first acquisition by a foreign firm of a major South Korean securities company, has taken over a Thai electronics firm, and has purchased major stakes in a Thai paper company and a Thai pharmaceutical chain. But rather than a quick kill, this longtime investor is looking for an insider’s pass to the corporate boardrooms that until last year’s economic meltdown were largely off-limits to foreigners.

In exchange for providing badly needed funds to cash-strapped firms, Hsu is demanding--and getting--the power to make sweeping changes from the executive suite to the assembly line.

“This is an unprecedented opportunity for those of us that have capital,” said Hsu, whose firm manages more than $700 million in 11 funds in Asia and is raising an additional $750 million targeted at Thailand and South Korea.

Although the world’s headlines have been dominated by efforts of the International Monetary Fund and other agencies to reshape Asia’s battered economies on a global scale, the real future is being plotted at ground level, where investors like Hsu are quietly rebuilding the region one company at a time. Their goal is to bring fiscal discipline to a part of the world where a strong work ethic and family traditions were not always matched by smart corporate behavior. These changes include hiring professional managers, imposing international accounting standards and ending the back-room deals that greased the political machinery in many Asian countries.

“We’re not saying these guys are all crooks,” said Eugene Davis, managing director of Finansa Thai, a Bangkok-based investment firm that recently invested in a major Thai media chain. “But if we’re going to put some reasonable money to work today in Asia, we want a little bit more than ‘Trust me.’ ”

Foreign investors have traditionally shied away from such involvement, given Asia’s cultural and linguistic complexities, the legal barriers and the hostility toward foreign involvement. Instead, when Asia’s developing economies began opening up a decade ago, most foreigners sank their millions in the region’s stock and capital markets, helping fuel the bubble that collapsed when they fled for safer ground after the Thai currency, the baht, plummeted in July 1997.

But amid the rubble of Asia’s worst economic downturn in half a century, investors like Hsu and Davis are beginning to flex their muscles. Not only are the depressed prices attractive, but companies are starved for cash and governments have been forced to reduce barriers against foreign access.

Remaking Asia’s corporate culture is a daunting task, particularly when it means prying open tightly closed corporations controlled by powerful families or conglomerates, who became accustomed to few restraints in an era of easy money and lax regulation.

But foreign investors warn that without this fundamental strengthening of Asia’s economic underpinnings, recovery in the region will be illusory even as billions of dollars in international bailout funds pour in.

“Otherwise, what you have is a lot of water being poured into a fairly leaky vessel, and the water will leak right out through all the special deals,” said Gary Greenberg, chief investment officer for Van Eck Global, a New York-based fund management firm.

Pushing the edge of corporate comfort is hardly new territory for Hsu, 55, who left IBM Research Laboratories in 1985 to establish one of Asia’s first Western-style venture capital firms. He partnered with Hambrecht & Quist, one of Silicon Valley’s primary backers and 15% of the company.

Hsu, who was born in mainland China, reared in Taiwan and educated in the United States, built a management team that was largely Asian-born and Western-educated. Rather than running his Asian operation out of one city, like most competitors, he set up a regional network of 11 offices employing 90 people.

But Hsu has remained a hands-on executive, participating in the audits of potential investments, providing final approval on every deal and visiting each office at least once a month.

Several years back, he decided the firm needed to get more directly involved in the companies it backed to boost its returns. Now about 65% of H&Q;’s Asia Pacific II fund, a $250-million pot, is in companies the firm controls, according to the chairman.

“Every company is like raising a baby,” said Hsu, who has racked up more than 5.4 million frequent-flier miles in the United Airlines jets that he jokingly calls home.

To be sure, some H&Q; investors are uneasy about the more aggressive investing stance, in view of Asia’s roller-coaster economic performance and the firm’s relative lack of experience in fixing troubled companies.

H&Q; Asia Pacific “hasn’t been a buyout organization historically,” said one H&Q; investor who asked not to be named. “Taking a firm worth several hundred million dollars and turning that around is not something they have a tremendous amount of experience with.”

But others believe H&Q; Asia Pacific’s home-grown expertise--its mix of cultural savvy and management experience--gives it a critical edge in a region where overseas Chinese dominate the economy.

“It’s the closest you can come to buying a Chinese fund with Western management,” said Michael Neal, head of investments for Indianapolis-based Eli Lilly & Co. and an H&Q; investor.

The financial turmoil in Asia has taken its toll on H&Q; Asia Pacific’s bottom line. But Hsu said his company survived with minimal damage, since only 11% of its portfolio was in the hardest-hit countries when the Thai bombshell exploded. Hsu had steered clear of Indonesia, a move that paid off earlier this year when the collapse of that Southeast Asian economy led to violent protests and President Suharto’s ouster.

“Everything had to go through a friend of the [Suharto] family or one of the children,” he said. “You could see there were going to be problems.”

In the coming months, H&Q; Asia Pacific’s main focus will be Thailand and South Korea, whose reform-minded governments are pursuing the region’s most aggressive restructuring programs. Also of interest is mainland China, where the firm recently took a stake in the company that will open the first Starbucks coffeehouse in Beijing.

The economic reforms in Asia are already leading to a rapid consolidation of players, particularly in the financial services, retailing and health care industries.

Public companies are H&Q; Asia Pacific’s preferred target because the market has already established their value. Many private firms are still in “denial” and often keep three or four sets of books--for their investors, the government, their relatives and themselves, according to Vikrom Pulges, the firm’s Thai director.

In a graphic example of what an outside buyer can do, H&Q; Asia Pacific in September engineered the purchase of Ssangyong Investment & Securities, an arm of the financially troubled Ssangyong Group, South Korea’s sixth-largest chaebol, or conglomerate.

The Ssangyong investment firm signed over the controlling family’s stake to Hsu’s firm, which agreed to raise $140 million to recapitalize its latest acquisition. More emphasis will be placed on its profitable retail brokerage business, according to Peter Ko, managing director of H&Q;’s South Korea office.

H&Q; Asia Pacific is also quietly engineering some revolutionary changes on the labor front. In a country where organized labor remains a powerful hurdle to corporate restructuring, the firm obtained an agreement from Ssangyong’s union not to strike for two years and to allow a work-force cutback of 30% by the end of next year, according to Ko.

“This could change the whole structure of the financial services industry in South Korea,” predicted Ko, who previously worked for Los Angeles-based William Simon & Sons.

In Thailand, H&Q; has kept a low profile, well aware of the growing concerns about “foreign bottom-fishers” seeking to profit from Asia’s pain. Critics oppose the government’s efforts to liberalize bankruptcy and property-ownership laws to attract foreign money.

Earlier this year, H&Q; bought Semiconductor Ventures Inc., a troubled electronics manufacturer that once traded for 600 Thai baht a share, at a bank auction for about 3 baht a share after persuading the firm’s creditors to reschedule the debt.

SVI, a provider of circuitry for timepieces, had lost its technological edge. Since taking control, H&Q; has brought in new managers, trimmed the work force and refocused the manufacturing line to produce more-sophisticated circuit boards aimed at the overseas market.

Peter Roskam, the SVI managing director kept on by H&Q;, is particularly heartened by his new employer’s willingness to spend money to develop a marketing network in the U.S. H&Q; Asia Pacific’s ties to the global high-technology world have already opened doors for SVI, whose primary markets were in Europe and Asia.

Change has come quickly at SVI, but it has been effected in a collaborative way, according to Roskam.

“Ta-Lin Hsu understands the [Asian] culture; it’s in his blood,” he said. “To clean up the balance sheet, you need the support of local management. He knows if you don’t make any dramatic moves in the beginning, you softly, softly catch the monkey.”

Winning over the management of Thai Cane Paper Public Co. was a more difficult task.

Thaveekiat Kollert, the firm’s managing director, was not eager to relinquish a stake in his family’s paper company. Thai Cane, founded in 1987, had experienced steady growth during Thailand’s boom years. In 1995, Thai Cane went public and a year later borrowed about $95 million to double the plant’s capacity. The cost of servicing that dollar-denominated debt skyrocketed after the baht collapsed.

Thaveekiat’s firm needed a way out of its crushing debt load. But giving up control of a family-owned business is particularly painful in Asia, where such a move is viewed as a failure even if the price is right.

“In Asia, the philosophy is to set up the company for the next generation,” Hsu explained. “Selling control is a disgrace.”

To allay those fears, H&Q; Asia Pacific, which had made a small investment in Thai Cane when it went public, acquired shares gradually. It now holds a 43% stake and occupies a seat on the board of directors. Meanwhile, exports have doubled.

“If not for the crisis, we would never have been able to take a controlling position there,” Hsu said.

Thaveekiat praised Hsu for recognizing the potential for Thailand’s economic rebirth long before others moved the country back into their investment sights.

“Today everybody says Thailand is good, Korea is good,” he said. “But [Hsu] saw it last year.”

Although this Thai businessman is grateful for Hsu’s help, he is looking forward to the day when he can invite his foreign partners to take their advice, along with a healthy profit, elsewhere.

“A partner like H&Q;, they are here, but they will not be here forever,” he said. “If we get stronger, we will be able to buy back our company from them.”