`Picking Up The Pace' At Ayala

No more low profile for the huge conglomerate

It wasn't a holiday when Ayala Corp. President Jaime Augusto Zobel de Ayala II took 35 senior executives to the Philippine resort island of Palawan in September. Zobel's troops went through an unprecedented Outward Bound-style, team-building exercise that included everything from walking across high-wires to writing poetry and learning to dive. It was all part of his effort to break down fiefdoms at the Ayala group, the largest and most venerable business organization in the Philippines.

The Palawan trip typifies the changes that have begun to stir the 162-year-old Ayala group, whose traded shares account for about one-fifth of the total market capitalization on the Manila exchange. The Harvard business school-educated Jaime and his younger brother Fernando took over day-to-day operations from their father in 1995. The two executives, both in their mid-30s, are the sixth generation of managers in a blue-blood Spanish-Filipino family that ranks among Asia's wealthiest. Its stake in Ayala Corp. alone is worth $3.6 billion, and the clan also has large private land holdings.

GO-SLOW APPROACH. Now, the new duo at the top is intent on expanding its property-and-finance business while venturing into manufacturing, telecom, and transportation. If those moves fail, Ayala risks losing its dominant position to younger, more aggressive companies, many of them run by Filipino-Chinese businessmen who are not as cautious about taking on debt.

This is quite a departure from Ayala's old go-slow, low-profile approach. That served the company well during the difficult years of the 1980s, when the grasping hands of dictator Ferdinand Marcos and economic turmoil felled many Philippine companies and the family was riven by dissension. But it doesn't make sense in the go-for-growth Philippines of the 1990s. "They're picking up the pace," says a Hong Kong-based securities analyst who follows the company closely. "It's a response to a hotter economy and it's a generational change."

Jaime Augusto aims to increase annual earnings by around 20%, more than double the 8% or so that the economy is expected to grow for the rest of the decade. Ayala floated a well-received $110 million Eurobond in May that carried a lower interest rate than Philippine government paper, a sign of the growing regard for the company among international investors.

His Harvard University MBA notwithstanding, 37-year-old Jaime Augusto isn't impressed by textbook theory about the need to focus on a few core business areas. And with the Philippine economy on the mend, he figures growth is fast enough to allow room for mistakes. "You can't just follow the rules [from] business school," says Jaime Augusto. For decades, this octopus approach to grabbing economic opportunities in Asia has been a proven way to succeed. Of course, as trade barriers come down and new competition moves into the Philippines, Ayala's conglomerate strategy could get riskier.

For now though, the administration of President Fidel V. Ramos has opened up unprecedented opportunities for Filipino businesses. Ayala's new interest in infrastructure follows Ramos' privatization program, one of the most sweeping in Asia. One big target is Manila's nightmarish transportation system. Ayala is a partner in a light-rail system designed to unsnarl Makati traffic, and it has proposed a rail system to serve the area south of Manila, where it has extensive landholdings. Ayala is also teaming up with Bechtel Group Inc. and Britain's North West Water Group to bid for an estimated $8 billion project to overhaul Manila's water-supply system.

Ayala has plenty of cash-spinning businesses to help mount its attack. It remains dominant in property, with a stranglehold over the Makati business district in Manila that provides the bulk of the group's profits. Last year, Ayala Corp. reported profits of $209 million on revenues of $926 million. More than half of the earnings came from its Ayala Land unit, which saw earnings jump 44% thanks to booming property values. Its vast land bank south of Manila is being developed for housing and for industrial space for the many foreign electronics and automobile companies streaming into the Philippines.

SLUGGISH. As the ranks of better-off consumers swell, Ayala is surfing to prosperity by building affordable housing. Jaime Augusto figures there's a backlog of 3 million people waiting to buy houses and apartments, so Ayala will build them, branching out from its traditional business of constructing high-end homes only. Ayala's Bank of the Philippine Islands, which is 12.6% owned by J.P. Morgan & Co. and 13.7% owned by the Catholic Archdiocese of Manila, will provide mortgages to these new homeowners. A recent acquisition makes it the second-largest private bank in the Philippines, and it plans to offer everything from car financing to consumer loans for the growing numbers who qualify for credit. The Ayala group also has plans to bolster its sluggish insurance unit.

So far, Ayala has used its regional connections well. For example, the Mitsubishi group, which bought a 19% stake in Ayala Corp. in the early 1980s to provide Ayala some protection should Marcos have designs on the company, put money into Laguna Technopark and brought in Kawasaki Steel as a co-investor. The two Japanese companies helped snare Honda Motor Co., which was looking for a Philippine assembly site, as an anchor tenant. Other Japanese suppliers followed. Ayala, for its part, took a 15% stake in Honda Cars Philippines.

Not all of these ventures will work. One area in which Ayala has had problems is telecommunications. Globe Telecom, a publicly listed Filipino company controlled by Ayala and Singapore Telecommunications Ltd., had to write off $16.8 million because of bad debts and fraud in its core cellular business during the first half of 1996. To get rid of delinquent customers, Globe pared one-third of its subscriber base. Now, with fewer than 50,000 customers, it languishes a distant fifth and last in the fiercely competitive cellular market. At best, the company will break even next year, while Jaime Augusto estimates that it will be three to five years before the telecom operation starts turning in meaningful profits.

Jaime Augusto vows that Ayala will make telecom a core business, betting that the nearly $1 billion in capital spending that Globe has earmarked for building a full-fledged network will ensure that it prospers. But the Philippines is one of the most competitive telecom markets in the world. Three of Globe's competitors are backed by some of the biggest names in the business--Japan's Nippon Telegraph & Telephone, Germany's Deutsche Telekom, and America's Nynex. "This is not going to be an easy business," he concedes. "It's going to take some guts, some stamina." The new generation at Ayala is out to prove it has both.

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