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PCCW Case

PCCW merged with HKT in 2000 in one of the largest deals in Asia, financing it entirely through debt totaling $12 billion. Following the merger, PCCW's stock plunged 82% within eight months as top management took advantage of regulatory loopholes to sell off shares. Several issues contributed to PCCW's decline, including its high debt load from the acquisition, global telecom stock sell-offs, and investment banks' biased recommendations since they were involved in the merger deal.

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196 views2 pages

PCCW Case

PCCW merged with HKT in 2000 in one of the largest deals in Asia, financing it entirely through debt totaling $12 billion. Following the merger, PCCW's stock plunged 82% within eight months as top management took advantage of regulatory loopholes to sell off shares. Several issues contributed to PCCW's decline, including its high debt load from the acquisition, global telecom stock sell-offs, and investment banks' biased recommendations since they were involved in the merger deal.

Uploaded by

amar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Case Background

With a market value of HK$ 401.9 billion as of December 1999, PCCW was a prominent
technology firm involved in the supply of broadband services, internet, and ISP supporting
services. In a deal that was one of the largest in Asia outside of Japan, the company merged with
Cables and Wireless HKT Limited (HKT), one of Hong Kong's top telecom operators. In August
of 2000, the transaction was finalised. PCCW financed the acquisition with a $3 billion 90-day
loan and a $9 billion 364-day loan. The financial markets and investment houses reacted
positively to the merger, sending share prices rising to HK$ 26.35. PCCW, on the other hand,
was a target for significant selling, with its stock plunging by 82 percent in only eight months.
While tiny retail investors lamented their losses, other corporate executives took a clean exit
route and profited handsomely. They orchestrated this by taking advantage of regulatory gaps
and insider knowledge.

Various levels of problems identified

● Financing the acquisition - Substantial debt


● Regulation loopholes
● Shares sell off by Top Management
● Global sell off of the telecom stocks
● Many investment banks involved in the merger - mostly buy recommendation

Details of Analysis/Interpretation

The PCCW-HKT deal was one of the most talked about deals of it’s time. To finance this deal,
PCCW took on a substantial amount of debt which included USD 3 Billion 90-day loan and
USD 9 Billion 364 days loan at floating rates. Following the deal, there was massive disposal of
shares by the top management. Richard Li, the Promoter and the Director of the company
disposed of 240 million shares through private placement. The management took advantage of
the regulatory loopholes which existed in the form of lag in the reporting period to the regulatory
authority. Another problem attributing to the problems was the global trends of telecom stocks
sell off and speculative activities coming up by the hedge funds on such stocks. Majority analysis
by investment banks recommended buying PCCW’s shares despite knowing the recent sell offs
by the Directors. This misguided the investors into making wrong decisions. The primary reason
behind biased recommendations was that, being one of the biggest mergers of that time, major
investment banks were directly or indirectly involved in the transaction.

Every news about PCCW had an effect on the share price due to the actions taken by the
majority shareholders. The news about educational qualification of promoter Richard Li and the
fund raising through rights issue, convertible bonds and private placements had major impact on
investor speculation and share price. The gap between any two successive events gave majority
shareholders the opportunity for share transactions.

Specific recommendations

● Shareholders shouldn’t simply follow the insider transactions. But it makes sense to pay
some attention to large volume insider transactions, as the directors and top executives
have most up-to-date information.
● Takings hints from the financing strategy of the merger and global trends
● Checking the change in the fundamentals of the company post merger
● Recommendations from Banks and Investment houses should not be blindly followed.
Investment decisions must be taken after doing proper research on the advice given by
them.

Final Conclusion

In all, we can conclusively say that the most evident issue with the merger of PCCW and HKT
was the financing strategy of PCCW for the project. Going for an all debt option to finance such
a big project would have not reflected well on the financial reports, and the minority stakeholders
could have taken a cue from this. The Case also justifies the efficient market theory, as the
market eventually priced PCCW to what it was worth fairly. We also understood that regulatory
loopholes could be dubiously utilized by the directors for their own personal interest.
We can even argue the merit of the very decision of PCCW trying to stop the Singtel and HKT
merger by itself buying the company. There could have been some other way for PCCW to grow
organically.
If we were a minority shareholder in PCCW we would have tried to notice the company's stock
price sensitivity to every bad news that came out and would have taken a decision based on it. A
sell option would have been difficult to assert as majority of the analysts claused a buy option,
but all the evidence clearly indicated that going bearish on PCCW was the right way.

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