International -- Asia Cover Story
THE NEW ASIAN MANAGER
First Pacific's mix of East and West may be a model for the future
It was a birthday bash to impress even Manila's most jaded elite. In the glittering ballroom of the grand Shangri-La Edsa Plaza Hotel, 400 people gathered, including Philippine President Fidel V. Ramos. Another guest was Anthony Salim, a member of one of the wealthiest overseas Chinese clans in Southeast Asia. The July party was held to celebrate Manuel V. "Manny" Pangilinan's 50th birthday. The son of a Manila banker basked in the tributes and laughed with the crowd at videos of his student days on scholarship at the University of Pennsylvania's Wharton School of Business.
The party was celebrating more than just the man's half-century mark. It was also a coming of age for his First Pacific Co. Since founding the group 15 years ago, Pangilinan has turned it into one of Asia's most dynamic conglomerates, with 13 member companies that are cutting deals from the Philippines to India. Stripped of extraordinary gains, earnings at the Hong Kong-based company leaped 40% last year, to $152 million, while revenues shot up more than a third, to $5.2 billion. The stock, which has soared twelvefold since its 1991 low, has been one of the best performers among major companies on the Hong Kong stock exchange for the past two years. On Aug. 30, First Pacific joins the territory's corporate elite as it becomes part of the benchmark Hang Seng Index.
First Pacific is more than just another fast-growing Asian conglomerate. It represents Asia's corporate tomorrow. A mixture of east and west, it's both entrepreneurial and professional. While it has the political savvy to do business in opaque Asian markets, First Pacific is transparent enough with its financial results to win a strong following among institutional investors. The group has placed huge bets on traditional businesses such as property development, but it has also entered less familiar industries, such as telecommunications. And it has created formidable alliances with everyone from Japan's telecom giant, Nippon Telegraph & Telephone Corp., to a tractor distributor in India.
What most sets First Pacific apart from its Asian rivals is the distance between the wealthy tycoons who fund it and the professional team that runs it. In most of the overseas Chinese empires that have fueled Asia's economic boom, the ranks of management are dotted with family members. While startup funds for First Pacific came from the Salims, the Indonesia-based family has given Pangilinan free rein to run the company. "We know our limitations," says Anthony Salim, the 46-year-old son of group patriarch Liem Sioe Liong. The family now owns 30% of the company. "[The Salims] are unique," Pangilinan says. "They've allowed First Pacific to have its own life."
That has enabled Pangilinan to stack his corporate ranks with high-quality professionals from Asia, America, Australia, and Europe. They're goaded by Pangilinan's workaholic habits--he recently held a staff meeting at an employee's wedding reception--and generous stock options. At headquarters in Hong Kong's Exchange Square, Australian and American executives rub shoulders with Filipino and Hong Kong Chinese colleagues. Ten of the 12 top executives at First Pacific Bank come from foreign banks, including six from Chase Manhattan Corp. "I'd be hard-pressed to find a parallel situation in another company," says Harvard business school professor Michael Y. Yoshino.
At the same time that the group has a Western veneer, it operates in Asian-savvy ways. Pangilinan knows how to play politics to the hilt. To prepare for a smooth transition in Hong Kong, First Pacific's base of operations, the group in 1993 sold a one-third interest in its bank to China's Ministry of Foreign Trade & Economic Cooperation at a bargain price. "It was almost a giveaway," says First Pacific Bank's Managing Director James C. Ng. "We wanted to buy long-term stability." A cellular-telecom venture in China's Fujian province piggybacks on goodwill generated by the Salims, who have invested heavily in the region. Pangilinan's friendship with Ramos has helped the company's expanding operations in the Philippines.
ASSET SHUFFLE? As trade barriers tumble in Asia and as more competitors enter the fray, the challenge for Pangilinan is to take each of these businesses to a bigger size and higher level of sophistication. In particular, he wants to build businesses to stand up to international competition. "You have to be bigger to compete regionally," says Pangilinan. "It may be time to rethink our businesses."
It was in 1981 that Pangilinan first sold the Salims on the idea of creating an overseas financial and trading arm that could leverage off their expanding international business. It was an odd coupling. In one corner, a traditional Indonesian group that had made money from protected markets in flour and cement, and by staying friendly with President Suharto. In the other, Pangilinan, a former American Express Co. investment banker who likes grand strategic concepts, flashy ties, intense twice-weekly games of squash, and 100-hour workweeks.
The first decade was largely a flop. A foray into California banking didn't work well after a poorly conceived $80 million purchase of a small San Francisco bank. A $50 million acquisition of an Australian computer company was initially a disaster, too. Pangilinan devoted too much time to big-picture ideas and not enough to the nuts and bolts of running businesses. "We focused more on conceptualization than making money," he says.
In 1991, with First Pacific's stock in the doldrums, Pangilinan changed course. He started junking businesses and focusing on four core areas: telecommunications, real estate, trade, and banking. That has helped win over many skeptics. Vice-President Derek J.M. Murphy remembers calling on Morgan Stanley & Co. in 1991 in an effort to raise the company's profile in the U.S. "We were cold-shouldered," he says. "Now, they're calling on us" in an effort to drum up investment-banking business. Last month, Morgan Stanley initiated coverage of the company with a buy rating on the stock.
JACKPOT. Patience also has been profitable for the Salims. The $152 million they have invested in First Pacific has bought them a stake worth more than $1.2 billion. For much of that return, they can thank Pangilinan for hitting the jackpot in telecommunications. In 1988, he plunked down $50 million for a struggling Hong Kong cellular company despite the Salims' opposition to paying so much for a company whose only real asset was a phone license. "There was nobody in the company who knew anything about telecom," says Henry R. Goldstein, whom Pangilinan brought in to run the business, known as Asia Link.
Now, Asia Link, which is not publicly traded, is on its way to becoming a major regional cellular telecommunications player. Morgan Stanley Asia Ltd. analyst Mike Warren thinks the telecom business will drive the company's growth for the next several years. He forecasts compound annual earnings growth of 36% in telecom from 1996 to 1998.
First Pacific's telecom strategy is to slash prices and come up with aggressive marketing gimmicks. Its "Price Buster" campaign helped it win market share in the Philippines by slashing high monthly minimums. The goal is to make up for smaller profit margins by dramatically increasing the size of the market. "We have to be a price leader," says Sau-wing Lam, a former banker who heads the Hong Kong telecom operations.
In Hong Kong, Asia Link is battling Hutchison Telecommunications Ltd., with more than 200,000 subscribers, to be the territory's second-largest cellular company. In late July, both were among the six winners of licenses awarded for next-generation cellular service. Asia Link is expected to invest $100 million in Hong Kong by 1999. In India in late May, Asia Link signed a $107 million contract with Lucent Technologies to build a cellular network in three states. Last year, NTT bought 15% of First Pacific's Philippine company, Smart Communications. First Pacific plans to float Smart Com by the end of this year in a deal expected to value the fast-growing operation at $2 billion.
First Pacific's trading arm, the other big-think 1980s idea that paid off, is also on a roll. Pangilinan says the group's trading operations, which posted 1995 sales of $3.6 billion, are on course to overtake Inchcape in 1997 as the world's largest non-Japanese trading house. Dutch-based Hagemeyer, which First Pacific bought in the mid-1980s, anchors the global trading business. It sells everything from cars to salami to industrial cables. A separate company, Tech Pacific International, is a fast-growing computer and software distributor in Asia that ranks among the largest Microsoft resellers in the region and just inked a major venture in India.
Banking is the weakest of First Pacific's four core businesses, but it is showing signs of life. After several years of retrenchment, which saw its ventures in seven foreign countries shuttered and its Hong Kong branch network shrink, First Pacific Bank is trying to increase its tiny 1.3% market share in Hong Kong by adding 10 more branches to its current 26 by the end of the decade. James Ng figures the bank can develop a profitable niche by targeting the "poor rich," those with net worths under $5 million, who usually get lost in the scramble by Hong Kong banks to serve the truly wealthy. To do that, the bank is spending money on tonier branches, offering a broader range of products, and giving larger depositors a rate that's a quarter of a percentage point above the market standard. Ng is doing something right: Net earnings jumped 36% last year, while assets soared 42%.
Much of First Pacific's future still depends on property. Its most ambitious venture is the massive Fort Bonifacio, a huge real estate project in the heart of Manila. First Pacific is the leading member of a consortium that also includes the Salims and Malaysian tycoon Robert Kuok. Last year, Pangilinan bid $1.6 billion for the site, making last-minute changes after the company's resident geomancer warned that Pangilinan's original, lower bid was not a propitious number. "I didn't want to tempt fate," says Pangilinan.
The plans are staggering: New office space alone will be more than four times as large as Hong Kong's central business district. Hundreds of 50-story buildings are on the drawing board. First Pacific is betting that the consortium can transform Fort Bonifacio into home for 300,000 residents and more than 1 million workers. Right now, it's a run-down military base overgrown with tall grass, bamboo trees, and sprawling bougainvillea vines. Even by the hyperactive standards of Asia, First Pacific's ambitions are large. "It's a once-in-a-lifetime opportunity," says Napoleon Nazareno, the 46-year-old engineer who heads Metro Pacific Corp., the main Philippine arm of First Pacific's operations, as he surveys the site from his 42nd-story penthouse office.
LONG ROAD. In addition to the $1.6 billion for 214 hectares of raw land near Manila's Makati business district, the First Pacific consortium will have to pour in $800 million just for infrastructure over the next few years. The project, which will be financed by selling off bits as development proceeds, makes some analysts queasy. Although investors have pushed up First Pacific and Metro Pacific stock since First Pacific won the bid, there are serious questions about the project's long-term viability. In its eagerness to get the land, First Pacific paid 40% more than the next bidder; it's the biggest gamble the company has ever taken. "Where is the end demand for all these offices and apartments going to come from?" wonders Andrew Baird, Philippine analyst for J.P. Morgan & Co.
Pangilinan is a believer. He thinks that a continuing boom in the Philippine economy, coupled with the Fort Bonifacio partners' deep pockets, will make the project a success. Under Ramos, the Philippines finally seems to be on track: The country's dilapidated infrastructure is being rebuilt, and foreign investment is sparking an export boom.
But Pangilinan's fascination with doing deals makes some analysts worry that management will get sidetracked from the tough business of running companies. Although he has been a booster of the stock for the past two years, Kleinwort Benson Securities (Asia) Ltd. analyst John V. Godfray wonders: "How much can they do in how many countries?" The company's steep debt load, totaling 76% of its equity, reflects this relentless dealmaking.
So as much progress as Pangilinan has made in 15 years, he still must meet some daunting new challenges. First Pacific does seem to be ahead of the pack in recognizing that Asia's supercharged growth can't last forever and that competition is intensifying. "In the past, you had the luxury of a big protected market," says Anthony Salim. "Now, there are no more monopolies."
Pangilinan says there is likely to be some trading of assets between the Salim and First Pacific groups as they bulk up their operations to brace for competition. First Pacific, for example, has one of the region's largest and most modern packaging plants in the Philippines. It could take over the Salims' packaging operations, which are in-house now. Another possibility: The Salims might take First Pacific's relatively weak food operations and meld them with its powerful ones.
As long as Asia's economic growth continues, First Pacific's businesses will flourish. Pangilinan is betting that phone usage will continue to increase, that individuals will continue to generate wealth, and that the sizzling increases in property values will spread to an emerging market such as the Philippines. Pangilinan and his team are in the right businesses in the right places, and they've got the financial discipline, entrepreneurial drive, and management diversity to build a new style of Asian conglomerate.By Mark L. Clifford in Hong KongReturn to top