Analysis on Bumi Plc: Fall of the Dynasty

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Prior to refinancing, PT Bumi had maintained all these monetisable assets while paying an exorbitant 19% annual interest rate on US$600 million in debt to the China Investment Corporation (CIC). Rothschild believed this imprudence was corporate governance-related. Because of all these conditions, Bumi’s 2011 financial report results in overall loss of US$282 million despite of US$280 million operating profit. That year it’s also stated that PT Bumi writes off a huge amount of loan receivables. This makes Bumi’s share price fell 23% that is 85% below IPO price.

After the Bakries proposed to separate themselves from Bumi by cancelling their shares and buying out the company’s stakes in PT Bumi and Berau, Rothschild made his move. He requisitions a general meeting to replace 12 of the 14 directors on the board with his own nominees. He targets to attack CEO Von Schirnding and the Concert Prty trio. He accused Von Schrinding of falsifying his law and accounting qualifications. But despite of all his effort to gain Bumi’s strength back, he ended up losing after Rosan Roeslani sold his entire 10% stake in Bumi to three separate investors. Rosan Roeslani’s decision made Rothschild hard to garner the majority votes he needed. The end of the case, shareholders voted to change the company’s name from Bumi plc to Asia Resource Minerals plc and the Bakrie family officially severed ties again on March 2014.

Key Decision Criteria

The key decision criteria used to do pick the recommendation among the alternatives that exist are:

- Abide by the core principle on governance of home country

- Respect local culture

- Benefit from the decision will be greater than the cost

- Doesn’t violate code of conduct and law enforced

- Doesn’t trigger any conflict or future conflict

- Doesn’t harm any stakeholders interest

- Maintain corporate image

Pros and Cons Of Reverse Takeover For Shareholders

Reverse merger is one kind of merger in which the private company acquires the majority of the share of the public company. Usually the majority shareholder will take over the company who has IPO in order to minimize any cost. In reverse merger, the private companies are allowed to become public company without raising any capital.

Pros: The private company can take over public company that has been IPO in other country. We can see in Bumi case that because Indonesian companies can’t be listed in the London stock exchange, the most common way to do is by buying a public company that already had an IPO in London like what Bakries has done. Private companies, generally with $100 million to several hundred million in revenue, are usually attracted to the prospect of being a publicly-traded company. The company's securities become traded on an exchange, and thus enjoy greater liquidity. The original investors gain the option of liquidating their investment, providing for convenient exit alternatives. The company has greater access to the capital markets, as management now has the option of issuing additional stock through secondary offerings. If stockholders possess warrants – where they have the right to purchase additional stock at a pre-determined price – the exercise of these options provides additional capital infusion into the company. Public companies often trade at higher multiples than do private companies; significantly increased liquidity means that both the general public and investing institutions (and large operational companies) have access to the company's stock, which can drive up price. Management also has more strategic options to pursue growth, including mergers and acquisitions. As stewards of the acquiring company, they can use company stock as the currency with which to acquire target companies. Finally, because public shares are more liquid, management can use stock incentive plans in order to attract and retain employees.

Cons: If the public investors sell significant portions of their holdings right after the transaction, this can materially and negatively affect the stock price. To reduce or eliminate the risk that the stock will be dumped, important clauses can be incorporated into a merger agreement such as required holding periods. It is important to note that, as in all merger deals, the risk goes both ways. Investors of the public shell should also conduct reasonable diligence on the private company, including its management, investors, operations, financials and possible pending liabilities (i.e., litigation, environmental problems, safety hazards, labor issues). (For more, see Why Public Companies Go Private. After a private company executes a reverse merger, will its investors really obtain sufficient liquidity? Smaller companies may not be ready to be a public company, including lack of operational and financial scale. Thus, they may not attract analyst coverage from Wall Street; after the reverse merger is consummated, the original investors may find out that there is no demand for their shares. Reverse mergers do not replace sound fundamentals. For a company's shares to be attractive to prospective investors, the company itself should be attractive operationally and financially. A potentially significant setback when a private company goes public is that managers are often inexperienced in the additional regulatory and compliance requirements of being a publicly-traded company. These burdens (and costs in terms of time and money) can prove significant, and the initial effort to comply with additional regulations can result in a stagnant and underperforming company if managers devote much more time to administrative concerns than to running the business. To alleviate this risk, managers of the private company can partner with investors of the public shell who have experience in being officers and directors of a public company. The CEO can additionally hire employees (and outside consultants) with relevant compliance experience. Managers should ensure that the company has the administrative infrastructure, resources, road map and cultural discipline to meet these new requirements after a reverse merger

Should Rothschild have been responsible for conducting due diligence on the two Indonesian companies before the formation of Bumi PLC

Managers must conduct appropriate due diligence regarding the profile of the investors of the public shell company. What are their motivations for the merger? Have