A troubled company, Renong case study

                Renong Berhad was established in 1982 in Malaysia and is known as one of the biggest Malaysian conglomerates that has close ties with the government. Renong also held their company reputation as a “political blue chip” company on Kuala Lumpur Stock Exchange (KLSE). The main reason on why the company grew rapidly and diversely was due to the influence of Tun Daim Zainuddin who was the economic advisor of former Prime Minister of Malaysia Tun Dr Mahathir. The main ideology behind this was seen as a transformation plan in which Malaysia would become an industrial power house, and at the same time creating a new class of bumiputra entrepreneurs. Hence due to this, Renong Group was able to secure many government contracts, licenses, and privatization deals, which in return lead to a diversified portfolio of investments which included Expressway & tolls; Engineering, Construction & Infrastructure; Oil & Gas; Property Development; Transportation; Telecommunication, Power, IT; Healthcare; Financial & Advisory Services and many more.

            However, when the Asian Financial Crisis hit the country in 1997, Renong suffered from a sharp fall of its share price. Halim Saad, the executive chairman of Renong, refused to restructure Renong to repay the creditors. UEM was at that time a subsidiary of Renong in which they had 37% shares of the company.  Before the Asian Financial Crisis, Renong’s market capital was RM8billion which signified 3% of Kuala Lumpur Stock Exchange (KLSE) total market capitalization. During the crisis period this capital had dropped to RM1.7billion, or 80% within a period of 3 months. Therefore in a bid to salvage the company, Halim Saad engineered a move in which United Engineer’s Malaysia (UEM) bought over 32.6% of Renong Berhad shares for RM2.34 billion or RM3.24 per share. This acquisition was not informed to UEM’s minority share holders and in return led to investors selling Renong shares which resulted to share price dropping from RM3.24 to RM1.49. UEM lost about RM1.81billion on its investment of Renong stock. Moreover, UEM was also fined for breaching the Companies Act 1965 under section 69(e) and damaged Renong and UEM credibility as a blue chip company. Malaysia’s economy took a further hit due to this as it was seen as a meltdown of a blue chip company which caused investors to pull out of Malaysia and caused a riptide effect in which many other companies took a hit on the KLSE.

            In order to appease the unhappy minority shareholders of UEM and to restore confidence into Renong Group, Halim Saad promised to buy the shares back with his own personal money in three years.  He had to pay RM3.2billion option price in four installments, which is the first three of which RM100million each and the remaining will be paid with interest on February 14, 2001. He managed to pay the first RM100million but failed to pay up the second when it was due which resulted in Khazanah taking over.  

            In my opinion, one of the main reasons why the company failed was because Renong Berhad had invested in too many different types of sector. When the Asian Financial Crisis hit, the Malaysian Ringgit was very weak against the US Dollar and foreign investors were pulling their money out in fear of losing more. This meant that all of the sectors in Malaysia were affected badly, and because of the weakening dollar and investors pulling out Renong as a group with all its diversified assets was hit badly by the crises. Another reason for Renong’s failure is because Halim Saad was known for relying on other people’s money hence making Renong the country’s biggest debtor.

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References

[1]        Raphael Pura (1998). Renong's Asset, Its History, Reveals It's Also a Liability. [ONLINE] Available at: http://www.wsj.com/articles/SB885153708408176000. [Last Accessed 16 April 2015].

[2]        The Economist (2001). Wrongs and Renong. [ONLINE] Available at: http://www.economist.com/node/709988. [Last Accessed 17 April 2015].

[3]        V. Anbalagan (2014). Halim Saad fails in bid to reinstate RM2 billion suit over Renong deal. [ONLINE] Available at: http://www.themalaysianinsider.com/malaysia/article/halim-saad-fails-in-bid-to-reinstate-rm2-billion-suit-over-renong-deal. [Last Accessed 17 April 2015].