The Shocking Effects in Malaysia's gerrymandered electoral system

 In May 2013, Ramesh Rajaratnam wrote an article showing the effects of the gross distortions inherent in our voting system as reflected by the results of the then 13^th general election (GE). He  opined that until this distortion is rectified, it will always be an uphill task for a party that is deemed an under-dog in any GE simply due to the malapportionment and delineation within our electoral system. It was most disheartening to note that after 8 years and 2 further GEs, the Election Commission (EC) recently said that there will not be any further delineation (electoral alignment) until 2026. Hopefully we will not see another GE before that.

 

Why is the integrity of the electoral re-alignment process of utmost importance and should be addressed immediately?

 

As seen in the recently ended GE15, the “rights” exercised by each citizen was severely disproportionate. A little history lesson to help understand this Orwellian equality would be useful to digest the implications of an uneven electoral playing field faced by the Rakyat.

 

When Malaya gained independence, the country had 52 parliamentary seats distributed within the 11 states. While the rural weightage was not specified, the Reid Commission (set up by the British masters to study the electoral system implementation in Malaya) provided that ‘the numbers of inhabitants within each constituency should be approximately equal except that, having regard to the greater difficulty of contacting voters in the country districts and the other disadvantages facing rural constituencies, a measure of “weightage” for area should be given to the rural constituencies’. At that time, a 15% additional weightage for rural votes was considered acceptable. However, due to political interference as a result of the growing concern that non Malays were concentrated in large numbers in urban areas, that rural margin weightage limit was adjusted to that ‘the Election Committee would not regard such weightage as unreasonable if in some instances a rural constituency should contain as little as one-half of the constituents in the more populous areas’. This was included in the terms of reference of the Constituency Delineation Commission (Federation of Malaya, 1954) to divide the country into 52 constituencies – the number of elected legislative seats finally agreed to by the British and the Alliance Party (precursor to Barisan National - BN). This skewered rural weightage resulted in Malay dominated constituencies in all but two of the constituencies. The Alliance Party won 51 of the 52 seats in the first federal election in 1955.

 

With the invitation of Sabah and Sarawak into Malaya to become Malaysia, the Alliance/BN orchestrated several delineation exercises and created numerous constituencies until it became the 222 seats today.  These “electoral exercises” (aka known as gerrymandering) were primarily done to affect Malaysian electoral outcomes: the distribution of the total electorate among constituencies (apportionment) and the determination of constituency boundaries (districting) – both done for political advantage to the ruling party, the BN. Delineating/creating constituencies with unequal number of voters (i.e. malapportionment) favours BN sub-component parties with more supporters in the smaller constituencies. Since the Opposition supporters were usually in urban areas, it was expedient to lump them all in a constituency that was lost anyway. This worked well till GE13 when the tide of the Rakyat’s dissatisfaction with the BN was originally sparked by Hindraf and later fanned by Bersih. Some say, without Hindraf’s brave stand against the blatant corruption and abuses by BN, the Rakyat would not have seen the change we see now.

 

Statistical overview:

 

Malaysian population:               34 mil

Malaysians registered to vote:    21 mil or about 62%

Malaysians actually voted:         15.9 mil or about 75% turnout

 

Electoral seats overview:

We analyzed the data collated from the 222 constituencies from the EC website and will make simple some statistics from GE15 that will shock many Malaysians on the Orwellian world of Malaysian citizenry as follows.

 

·       Selangor with a population of 7 mil or about 22% of Malaysia, has 22 seats or less than 10% of the parliamentarians.

·       Sabah with a population of 3.4 mil or about 9% of Malaysia, has 25 seats or about 11% of the parliamentarians.

·       Sarawak with a population of 2.5 mil or about 8% of Malaysia, has 31 seats or about 14% of the parliamentarians.

 

·       The largest constituency (Bangi) with almost 303,000 registered voters got one YB whereas the smallest (Igan) with 28,000 registered voters, got their own YB. Amazingly, a rural Malaysian has 11 times more voting power than someone in Bangi.

·       As seen from the chart above, the top 5 urban constituencies with a registered vote base of 1.25 mil earned 5 parliamentarians while the bottom 5 rural constituencies with a vote base of a mere 154,000 also earned themselves 5 parliamentarians. This totally anomalous constitutional rights abrogation takes gerrymandering to new heights.

 

1.     8% of Malaysians gave 73 seats to Perikatan Nasional (PN)

 

The terrible outcome of this gerrymandered electoral boundaries is that today, 8% of the population voting for PN, gifted it 73 of the 222 law making seats. Pakatan Harapan (PH), getting almost 28% of the votes cast, or some 4.4 million votes, won 82 seats. If the original 15% overweight margin for rural seats had been maintained, PH would have won at least 103 seats.

 

Then Dato Seri Anwar Ibrahim (Anwar) would have had to court only 9 Yang Berhormats (YB) running as “Bebas” to form the government: i) we would not need 2 Deputy Prime Ministers, ii) YBs with pending criminal charges would not feature in the new government, iii) cabinet would likely be limited to 25 ministers.

 

2.     BN won 4% of the votes but controls 30 seats in Parliament

 

This statistics is perhaps the most vile of all in terms of its devastating effect. Can you imagine, a mere 681,278 Malaysians voted in 30 YBs from BN into our Parliament. These 681,278 form just 4% of the Malaysian population. The most outrageous outcome was that the BN, through some 60 years of unfettered fiddling with the electoral boundaries, needed an average of 22,709 voters per rural constituency, to put its (wo)man in power. Anwar needed almost 54,000 voters per constituency for one YB from PH.

 

If the Rakyat had allowed BN to continue at this rate of electoral reengineering, by GE 16, it would need about 8% of the total voters or about 1.3 million Malaysians only, to take over the government for a population of some 35 million by then: All Malaysian voters are equal but some are more equal than others?

 

3.     PAS won 12% of the total votes and controls 20% of the Parliamentary seats

 

PAS leader Tan Sri Hadi Awang (Tok Guru) was dead wrong when he said that PN was the winner of the election when the statistics clearly show that only 12% of the Malaysian voters chose PAS. And these too, were mainly limited to the rural Malay majority states of Kedah, Kelantan, Perlis, Kedah and some constituents in Pahang, Perak and Johor. The visual representation below of the voting outcome is rather misleading.

 

 

 

To put this “green wave” theory into perspective, PAS won in states (and constituencies) that make up about 23% of the Malaysian population. There is another analysis that says PN took about 54% of the Malay votes. How can PAS claim to have acceptance by “most” Malaysians as the party to lead the government. About 25% of Malaysians did not vote and this was a big disservice to the voice of reason in GE15.

 

Someone please show Tok Guru our analysis as he is clearly causing a lot of confusion among the unsuspecting Rakyat.

 

4.     Sarawak had the best “bang for the buck” in terms of performance in GE15

 

It is very apparent that Abang Jo is the ultimate winner in this GE. He managed to garner less than 674,000 votes but ended up with 31 seats in Parliament. GPS needed less than 20,000 voters per constituency to become the 4^th largest bloc in Parliament.

 

Because of this powerful voting leverage, we are betting that a Deputy PM post will be offered to Sarawak. We could also see at least 2 Sarawakians or more, as ministers in Anwar’s cabinet.

 

5.     DAP was the most successful party in GE15 but its appeal is limited to urban areas

 

From our analyses, we noted that the DAP made up 17 of the top 20 biggest majority wins, with PKR and Amanah bagging 2 and 1 seat(s) respectively.  What this means is that while DAP’s wins were very significant (majority exceeding 50,000 in 18 seats), it appears to be strong only in the larger urban seats in Peninsula Malaysia. It still has a long way to go in East Malaysia where local parties clearly dominate. DAP is still feared in the “green wave” states – opponents have successfully made DAP the bogeyman in this GE. And very likely in the next?

 

Conversely, PN won narrowly in 13 of the 23 slimmest majority seats. Interestingly, in the PN narrow win seats, many were just by less than 800 votes. We’re not sure if the competition had insisted on recounts as some 10 seats could have gone either way given the slimmest of margins. Maybe even the postal votes could have made the difference ?

 

6.     Race and religion baiting won the day for PN

 

It is obvious that there is a great divide in our diverse population both in terms of race (and religion) and urban vs rural voters. We have not up-played the racial voting pattern in our analyses to avoid threading on sensitive grounds.

 

None of the “good stuff” done by PH in its 22 months of power like arresting graft, reducing seepages in the economy, implementing transparency and governance, imposing higher standards of public accountability, improving health and social infrastructure, enhancing public interest bodies and indeed, going after the “bad guys”………..mattered at all in the rural areas.

 

Malaysia’s rural folks are more interested in the price of chicken, eggs and whether they will go to the right heaven, or not at all.

 

As the title of this essay suggests, the effects of gerrymandering once again drove the skewered results of this GE. To put this into an absolute shocker: The BN and GPS won a total of 61 seats with the number of votes less than the folks in the constituencies of Bangi, Kota Raja, Damansara, Subang and Tebrau who got themselves 5 parliamentarians.  

 

We are hopeful that the incoming government will consider seriously our observations and have some solutions for the ordinary Rakyat who seek to be fairly represented in Parliament.

 

 

(Ramesh Rajaratnam and CK Loh are keen observers of Malaysian politics)

 

 

CUTTING OUR NOSE TO SPITE OUR FACE......the DEJA VU!

On 25 Aug 2019, I wrote a similar headed article to counter the disappointment the Raykat felt over the performance of PH ministers in the 16 months (then) of power.

I had lamented that the mistakes of these 16 month old babies will be used to "punish" them in GE15. My fear is now a reality where both the BN candidates and some disappointed Rakyat, are using to smear PH candidates. So I thought for GE15, I will now write a piece on this topic....again. But since everyone here is aware of the many good reasons, politically and economically, of the parties standing for GE15, I will pen this merely based on an analogy.

 

To start, let's just assume that the "baby" is the 22 months novice PH and the Grandfather is 65 year old BN. I'm not going to be bothered about the former (aunty divorced him) Uncle PN and the pesky Great grandfather GTA who just won’t die. These two relatives are turning up uninvited to spoil my tea party.

 

Let's put this into perspective:

 

We have the baby (now a toddler) asking us to be allowed some space so that he can grow up and become a youngster. He has all the energy required to grow up and indeed, become a productive adult who can be a useful human being for the benefit of the Rakyat. Yes, being a toddler, he will still tumble and fall sometimes but he is agile enough to pick himself up quickly and move fast. Besides, given his youth, he can afford to fall a few times and each time, he will learn to balance himself better and become steadier. This is afterall, how life progresses.

 

On the other hand, the 65 year old Grandpa still wants to run the country. The only advantage that he has, insofar as walking is concerned, is that he has been walking erratically for 62 years. Now remember, we have had this old fellow falling down, walking into potholes, walking through the backdoor and more. Even worse, Grandpa has consistently walked into the potholes deliberately ignoring warning signs. It's almost as if Grandpa couldn't give two hoots to his family’s warning. In many instances, Grandpa has been found sneaking around at night and stealing cookies from the family jar. If anything, most of his trips in the past 62 years have been pretty dismal....leading his family further downhill. 

 

If we let Grandpa roam freely again, Grandpa will most definitely take his "keluarga" deeper down into the Rabbit Hole. Family experience has shown that Grandpa has become an incorrigible old codger who cannot be reformed. There is no doubt that he has expired his lease and should now be put into the old folks home for good. We, his “keluarga”, can visit him from time to time. Incredibly, we are now asked to consider giving Grandpa another go to repeat his mistakes just because our Toddler fell a couple of times?

 

Granted, the Toddler, being a baby, has made some blunders. Just like all babies and youngsters do. Considering that even older adults make frequent mistakes, one should not simply whack the baby learning to walk. What does a parent do when the baby stumbles and falls…..we teach them how to get back on their feet and encourage them to walk again.

 

Choose whom to support wisely folks.

ARE YOU INDIAN ?

I just love reading/watching the clips on the new PM of UK. Good fun and a reflection of global society’s sectoral views as a whole.

 

The Indians world over are “bhangra-ing” in joy as if Rishi was from Chandigarh.......he probably can't speak 3 sentences in Punjabi. He speaks and behaves like a Caucasian - at best a "coconut" (brown outside but white inside). But for what it’s worth, we can't take away his blue blood upbringing (his grandma from Africa was the one who should be credited for her wisdom in seeking greener pastures ie the UK back in the 1960’s) and his Oxford-trained business acumen. The UK needs a smart person to be the PM in these troubled times. After the snowballing mess of May, Boris and Truss, it’s very hard for anyone to do worse (except for some Malaysian ministers).

 

The (some) Whites are aghast that a "brown" man is now leading the "old white country". It's rather ironic because if you are familiar with London’s transport, be it the train, tube, bus or other forms of public transport - the majority of the passengers are likely to be "persons of colour". So much for a "white" country. For heaven's sake, the mayor of London has been brown for the past many years. There are about half dozen MPs in Parliament that are of Indian origin and another dozen of African origin. And the best of all, David Cameron even predicted the imminent probability of an Indian origin PM way back in 2015 so I'm not so sure why the fuss now. England has had some 7 dismal years trying out pale nuts as the PM. A coconut now would be a refreshing change.

 

The Americans and Canadians are happy that now, they are not the only white country with brown/black leaders. Don't forget that about 30% of the top listed companies in the US is helmed by people of Indian origin. From Google to Starbucks.

 

And then we have the Chinese folks....this is the most surprising of the whole lot. One would have thought that having a fellow Asian as the leader of the UK would be a proud thing (ie tumpang glamour) for all Asians. But from what I've been reading in the many chat-sites, most comments are less than flattering. I reckon many are now counting down the days the coconut will be in office. Perhaps it's the silent effect of covert political propaganda. Afterall, China is likely to feel threatened because in the G7, there are 3 PIOs in position of power, and Japan. Basically only Italy and Germany can be counted on for support if the CCP misbehaves (by Western standard of course). So the diaspora may be subconsciously reacting to this threat and doing it’s part to sow the seeds of doubt. Go ahead and take a poll of the people of Chinese (POC) origin and see what they have to say about Sunak's elevation. Now just imagine if a POC was elected as the leader of a white country.......the bhangras, oops...the drums will be "gong-ing" globally. This phallic envy syndrome is something that I cannot understand but I expected this.

 

Btw, back home the Malays are rather quiet on this minority's election to the highest public office. Hmmm.....why ah?

 

Meanwhile, I'm watching this space and please join me in the pun and laughter.........heaven knows we need some....whichever way you lean.

 

 

Maybe the Malaysian Indian "Obama" will come one day?

ஒருவேளை ஒரு நாள், நம் "ஒபாமா" வருவாரா?

It's no secret that the Indian Malaysian is the most disadvantaged population segment in this country.

Both the Malay and the Chinese discriminate the Indian...from simple things like rental of properties to promotion in companies/government bodies. There's no denying this racism in Malaysia. Look around us and you can see this. Last week, my mechanic who is a Chinese, told me this as he was lamenting the cost of living "boss, di Malaysia sekarang mau hidup banyak susah. Tapi klu India, lagi teruk susah...semua pun India susah mau dapat".

The only time(s) the Indian is respected and sought after are in the medical and legal fields So if an Indian Malaysian doctor or lawyer was to overcharge the other races, I have no sympathy at all. Thank god for little mercies in life. Not exactly an exemplary attitude but one that is forged through personal experience and observation.

So the Indian Malaysian is left with only his vote. Unfortunately, there is not a single constituency that Indians form a majority. But there are at least 30+ enclaves where the Indian votes can swing the balance ie we are the Kingmaking voters.

So fellow Indians, hear ye hear ye.....don't be fooled by the crooks in BN who come around once in 5 years to beg for your votes with free rice, oil and petrol money. Show your disgust by delivering the deciding vote to the party that at least tried to do something for us in the last GE.

Maybe one day, our "Obama" shall arrive?

இந்திய மலேசியர்கள் இந்த நாட்டில் மிகவும் பின்தங்கிய மக்கள்தொகைப் பிரிவு என்பது இரகசியமல்ல.

மலாய்க்காரர்களும் சீனர்களும் இந்தியர்களை பாகுபாடு காட்டுகிறார்கள்... சொத்துக்களை வாடகைக்கு விடுவது முதல் நிறுவனங்களில் பதவி உயர்வு வரை. மலேசியாவில் இந்த இனவெறியை மறுப்பதற்கில்லை. எங்களைச் சுற்றிப் பாருங்கள், இதை நீங்கள் பார்க்கலாம். கடந்த வாரம், சீனரான எனது மெக்கானிக், "முதலாளி, மலேசியா சேகரங் மௌ ஹிடுப் பன்யாக் சுசா. தபி க்ளூ இந்தியா, லாகி டெருக் சுசா... செமுவா பன் இந்தியா சுசா மௌ டபட்" என்று வாழ்க்கைச் செலவு பற்றி புலம்பியபடி இதை என்னிடம் கூறினார்.

மருத்துவம் மற்றும் சட்டத் துறைகளில் மட்டுமே இந்தியன் மதிக்கப்படுவதும் தேடப்படுவதும் ஆகும், எனவே ஒரு இந்திய மலேசிய மருத்துவர் அல்லது வழக்கறிஞர் மற்ற இனத்தவர்களிடம் அதிக கட்டணம் செலுத்தினால், எனக்கு எந்த அனுதாபமும் இல்லை. வாழ்க்கையில் சிறிய கருணைகளுக்கு கடவுளுக்கு நன்றி. துல்லியமான ஒரு முன்மாதிரியான அணுகுமுறை அல்ல, ஆனால் தனிப்பட்ட அனுபவம் மற்றும் கவனிப்பு மூலம் உருவாக்கப்பட்ட ஒன்று.

எனவே இந்திய மலேசியர் தனது வாக்கு மட்டுமே மிச்சம். துரதிர்ஷ்டவசமாக, இந்தியர்கள் பெரும்பான்மையாக உள்ள ஒரு தொகுதி கூட இல்லை. ஆனால் இந்திய வாக்குகள் சமநிலையை மாற்றக்கூடிய குறைந்தது 30+ தளங்கள் உள்ளன, அதாவது கிங்மேக்கிங் வாக்குகள்.

எனவே சக இந்தியர்களே, நீங்கள் கேட்பதைக் கேளுங்கள்..... இலவச அரிசி, எண்ணெய் மற்றும் பெட்ரோல் பணத்துடன் உங்கள் வாக்குகளுக்காக 5 ஆண்டுகளுக்கு ஒருமுறை சுற்றி வரும் பிஎன் வஞ்சகர்களை நம்பி ஏமாறாதீர்கள். கடந்த GE இல் எங்களுக்காக ஏதாவது செய்ய முயற்சித்த கட்சிக்கு தீர்மானிக்கும் வாக்குகளை வழங்குவதன் மூலம் உங்கள் வெறுப்பைக் காட்டுங்கள்.

ஒருவேளை ஒரு நாள், நம் "ஒபாமா" வருவாரா?

Land Prostitution ?

 Recently, there was some excitement over the press release below.

Technically, the $52 bil can be raised from the Tamils outside of Sri Lanka quite easily......about $17k per pop. Add with the several Tamil billionaires' contribution to the Ealam pot, maybe the average for the rest drops to say, $2,000 each. But this is not a numbers game.

The Singhalese -Tamil conflict has been going on for more than 900 years. The "who was here first" argument is like the chicken and egg debate. Depends on whose his-story one subscribes to. Historically, Sri Lankan Tamils (also called Ceylon Tamils) are descendants of the Tamils of the old Jaffna Kingdom and east coast chieftaincies called Vannimais. The Indian Tamils (or Hill Country Tamils...mostly in Kandy area) are descendants of bonded labourers sent from Tamil Nadu to Sri Lanka in the 19th century to work on tea plantations. The Tamils (from India) being one of the oldest unified races in the world probably have more claim to the land where Adam & Eve lived but I'm not discussing that here.

When the Rajapaksa brothers "defeated" the LTTE in 2009, there was much rejoice among the majority Singhalese. Albeit some 100,000 people were deliberately butchered (the UN has termed it genocide) by the Army (under the current president's orders) in May 2009, till today, the Rajapaksas and their ilks have not been brought to trial. The Tamils in SL are generally poor and when there's no money, nobody is interested in fighting for "human rights" nor the CNNs of the world are interested........unlike in Ukraine. In a sad way, brown lives don't matter as much as the white's. (I hope FB doesn't jail me again for telling the truth).

I think this new proposal by the Tamils for Biden (a society in the US), while intended for good purpose, serves to give false hope to the downtrodden Tamils in Sri Lanka. In my opinion, the GOSL is unlikely to accept this offer because:

1. It will be a direct insult to the Singhalese majority - selling "their" country for money. Prostitution comes to mind. Land is ALWAYS a sensitive issue......Malaysia fought Singapore over a piece of barren rock (fortunately in court). Land is always a national pride and many wars were fought over it. I bet Russia is regretting the Alaska sale to the US.

2. After gloating over their victory, do you expect the SL Army to agree to the partition. The last time a partition was held in the Indian sub-continent, more than a million people were killed. The situation is similar now. Tamil owned lands in the North, North East and South East have been "infiltrated" with Singhalese settlers....often brought in by the SL Army to break the Tamil ties to the land.

3. In fact, rewards are being offered to Singhalese to settle in Tamil areas. Likewise with religious places - temples are demolished or converted to Buddhist shrines. The list goes on. Do you expect the Singhalese govt to give all these up for $52 bil?

4. For some 50 years since independence, Sri Lanka has been touting itself as a model Asian country. And now, to carve out part of it's land to Tamils - will indicate that there was failure. Not that the rest of the world doesn't already know but to admit failure, is another thing.

5. The Sinhala Buddhist caucus is very powerful in SL. It's the only form of Buddhism that has violence deeply rooted in it's philosophy (although the Singhalese Buddhist that you and I know will deny it) - go check, Buddhist priests have been known to kill Hindu Tamils and supported pogroms in the past. Conceding defeat to the Tamils (by partition) will be a direct slap on these crazy monks. They will never allow the GOSL to even consider this proposal.

6. Part of the reason why SL was able to "survive/succeed" was due to the Tamil DNA. Although bullied, cajoled and subdued (reminds us of another Asian country ?) by the majority, the minority Tamils had some world beating qualities and its shown in the likes of Ananda (Malaysia), Gnanalingam (Malaysia), Rajaratnam (USA), Chandran Ratnam (SL), Ken Balendra (SL), Tharman (S'pore), Subaskaran (UK) and many others. The Tamil DNA has helped Sri Lanka progress faster. Now, losing this "intelligence pool" of the minority race by partition, would be a daunting prospect to the SL govt...all for $52 bil. It's no a no brainer.

There are many other lesser reasons why the proposal is unlikely to be accepted by the GOSL but I hope I'm wrong for the benefit of the SL nation.

A couple of years ago, I had penned a piece on another option....one that is expected to cost at most $10 bil. When the going gets tough, the tough get going......somewhere else.
You can read this in my blog: https://r-tickles.blogspot.com/.../cut-loss-now-and...

As Moses said....."follow me to the Promised land". It took the Jews almost 3000+ years to get Israel. Will the Tamils in SL also wait that long?

Or will there be enough gumption and instinct to make the move now. Only time will tell. 

EPHEMERALITY OF LIFE ?

 IT'S MY LIFE, I AIN'T GONNA LIVE FOREVER......

"My grandma and your grandma

Were sittin' by the fire

My grandma told your grandma

I''m gonna set your flag on fire"

One of the things I regret is the ephemerality of my life.

Barring the wonders of a very likely futuristic hybrid "memory chip" transplant/cryogenics (or a similar technology within the next, say, 30 years) technology, I will also have to sadly bid a final sayonara to humankind that I knew it to be. At 57, I've seen quite a bit but I'd like to see more. Don't we all wish that we had more time on this earth - if only to hug your great grandchildren once more? To tell them some more "grandmother" stories. Or to travel the journey that was last on your bucket list?

Or just to kiss your wife/lover one final kiss?

If you're a God fearing but unsaved Hindu or an unenlightened Buddhist, you may have another 1900+ lifetimes to enjoy (or endure) but, as a semi agnostic but universally receptive person, I'm not too sure of this reincarnation possibility. I've read enough to say that science is not always correct. So I will leave it to you to form your own opinion(s) on the finality of "life".

Now however, within our own abilities and present technological facilities, we are presented with this possible conundrum of "life" - see below:

When I was a young boy, I noticed that every Friday at about 2pm, my grandfather would leave the house, walk away somewhere, and come back after 4 hours. This happened regularly like clockwork for several years.

My curiosity was aroused so much so that I asked my daddy, "Papa, where does Grandpa go every Friday afternoon?"

To which my father replied, "He goes to the Mentakab central bus stop. He spends time with his friends drinking coffee and chit chatting."

This type of routine is very common among the elderly. A group of old friends would meet in some kopitiam/cafe, have coffee, and reminisce about the good old days. They would make sure they don't miss any session. Afterall, it is only to these guys they are able to say, "Do you remember...? There's nobody else alive to remember their life.

So please now document your life pictorially and when possible, with little notes, essays etc. One day, your (grand)son/daughter will be able to appreciate your life. Right now we are fortunate that we have tools like FB and Google album to do this. I always post my life stories although many of my friends and family will laugh and say "this Ram is a crazy fellow, he will post "everything" on FB for public consumption".

I always laugh back - It's ok. In about 50 year's time, my kids (all 3 of them) will find these pics /stories in the "cloud" (or whatever medium then) and say...."Ah, that's my (grand)Daddy....and we know how he lived, loved and died".

And you know how we (then looking down from heaven) will realize this ? When maybe, their friend in 2057 will also say, "hey, I also see my (grand)father there with your's!"

It's said, we survive by our children and grandchildren. So why not help them a little in their journey of discovery? I'd like to think my (grand)children will say, "daddy was a far sighted man. He kept great records".

Maybe, I'm not the only sentimental fool. How about you?

Valuation in M&A SCENARIOS: Whacked by WACC, Discounted by DCF, Bitten by EBITDA, PERsecuted by hoRatio…and many more

Often in the course of my official and non-official capacity, I am asked about the valuation of businesses and projects. Often, I am amused by the terms that we accountants use to calculate “Value” and consequently, determine “Valuation”. After almost 20 years, I must admit, at the risk of losing my clientele, that I too am completely bewildered by the myriad of methodologies and terms applied in calculating Value: WACC, DCF, EBITDA, PER, NBV, NTA, MV, PBV etc. Every now and then someone comes up with a new way ( or acronym ) of calculating Value but how many of us really understand these concepts ?

 

What is Value ? And how does one decide on Value ? Ludwig von Mises, one of the most influential capitalists of our times described it as: “Value is not intrinsic; it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment. Ultimate decisions, the valuations and the choosing of ends, are beyond the scope of any science.”

 

If Mises could say that, then why do we, presumably lesser-enlightened beings, try to even put a scientific or mathematical formula to assess Value. But I guess, if we do not agree on a common method, then there is no end to determining Value as you and I know: A couple of years ago, a prospective client told me that based on his accountant’s calculations, applying the Discounted Cash Flow ( DCF ) method, the RM 20 mil he was considering paying ( borrowing partly ) for an acquisition would give him a payback period of about 6 years on his cost of investment, better than the industry’s average of 7 years: Prima facie, this appeared to be a good deal ? I told him to forget the deal if that was the expected returns…….I’ll tell you why later in this article.

 

Given that an accountant’s work is almost as glamorous as a pilot’s, especially in a single’s bar; in layman’s term, I shall now attempt to explain below the several easier common methods that are used to value companies and, highlight some personal observations in each of these methods. Because doubting these well-established methods will be considered sacrilegious, I’ll task you with the questions, you can be the judge?

 

1. Market Value ( MV )

 

Where the shares of the company are listed, in essence, the MV is simple to determine: Multiply the quoted share price of the company by the number of issued shares. This reflects the price that the “market” is prepared to pay for the shares of the company, at specific intervals in time.

 

This valuation is influenced by the condition of the share market, the industry-specific issues and opportunities that are seen for the company, and naturally, investor confidence in the market as a whole. In mature markets, the price should reflect the investors’ sentiment of the ability of management to deliver a decent return on the assets of the company. It is indeed arguably true that the share price may also reflect the synergies that an expansion ( acquisitions, new lines, personnel etc ) may bring – to an extent, forecasting up Madam Zorra’s alley.

 

However, in more versatile markets, the fact that the Chairman went to China to treat his inflamed piles may easily be spun by the doctors to give the supposition of the company obtaining a pharmaceutical concession in the land of the Billion ( = huge pharma-care market for the company ). The share price then shoots up from a mere 16 sen to RM 4 on an astronomical run – a market capitalization boost of 24 times.  Question 1: Fair MV ?

 

In most cases, the available ‘float’ ( i.e. the shares that are actually traded freely in the market as opposed to the amounts controlled, and hence not traded freely, by smaller groups of shareholders ) is usually in the region of 15% to 25% of the total issued shares of the company. This means that the “market value” of the company is, ironically, controlled by the market price of the smaller float rather than the larger untraded shares. In a hypothetical situation, someone gaining control of a third of the free float of, say, 15% of Company X and having the cooperation ( not to sell their shares when the price is trading up ) of the major shareholders of Company X, can actually determine the market value of Company X by chasing up the ‘market price’ of Company X’s shares. So a fairly dormant Company X, whose 40 million ( float of 6 million ) shares were quoted at RM 10 in day 1, would have had a market capitalization of RM 400 million. Then comes along Mr. P who buys up 2 million shares in Company X from the market – naturally because of the small free float, the share price will move up, possibly by at least 33% ( provided that the controlling shareholders do not sell ), and the price of Company X’s share closes at RM 13, an increase in Company X’s ‘market value’ from RM 400 million to RM 520 million in 8 trading hours ? And this phenomenal MV increase arose out of purchasing a mere 2 million shares ( 5% of the paid up capital ) – who then, one may ask, controls the MV ? Of course there are laws to prevent this… Question 2: Fair MV ?

 

No matter how sophisticated the markets are, never though, does the Market price ever reflect the ‘break-up value’ of the whole company: The sum of the units are almost always, smaller than the individual units, if separately listed; usually on the excuse that the yield potential and risk profile of the spun off entities are different etc. Really ? In a ‘spin off’ situation, the Board ( let’s face it, a few independents may be inducted to provide governance, and protection for the new minority ), Bankers and virtually all stakeholders would remain the same as the pre spin-off entity: Just look at the recent spin offs locally, what’s the real difference ? It is almost as if, by consolidating the group’s operations for better management of its resources, the market penalizes the company for the ‘consolidation’ efficiency ? Question 3: Fair MV ?

 

The ability to spin off mediocre units of a company in a bullish market has created false performance marks for many a CEO in the developed economies. It’s only a matter of time ( I am not saying that it hasn’t been done yet ) that such ‘wealth unlocking’ mechanisms are imported and rode on liberally, in our market: ENRON was a classic example where presumably under performing units were spun off into Special Purpose Vehicles ( SPV ) and traded in various forms.  Think about this: If pursued, a debt of RM 1 billion can be taken off the Balance Sheet, injected into an SPV and by way of legally crafted investment means, brought back into the Balance Sheet as an investment at, voila! Market Value ? For the accountant in you, it’s not hard to pass these net book entries:

 

On disposal of debt to the SPV:

Dr. Balance Sheet – Loan from Banks RM 1 billion

Cr. Balance Sheet – Due to Investment Banks ( IB ) RM 1 billion

 

The IB then flogs this quality debt at an equitized value of RM 2 billion. The company buys this debt paper, at the MV of RM 2 billion:

 

Dr. Balance Sheet – Investment in SPV RM 2 billion

Cr. Balance Sheet – Due to Investment Banks ( IB ) RM 2 billion

 

The IB passes back the ‘profits’ of equitizing to the company:

 

Dr. Balance Sheet – Due to Investment Banks ( IB ) RM 1 billion

Cr. Profit & Loss – Gain on ‘disposal’ RM 1 billion

 

The net effect: A ( paper ) gain of RM 1 billion due to spinning off the loan into an SPV. The higher the leverage out and circuitry of the SPV by the friendly IB, the higher the propensity for flogging the equitized price: a ‘win-win’ for both the company and the IB. When this scheme fails, as it inevitably would due to the gearing up effect in the Balance Sheet, the masterminds would have divvied up the ‘profits’ and long disappeared. Accounting policies as they stood then, would have allowed this. Question 4: Fair MV ?

 

2. Market Value Added ( MVA )

 

At this point, it is worth bringing to attention a related MV method of valuation - Market Value Added ( MVA ): MVA is a cumulative measure of wealth created by the company for its investors. It is calculated by comparing the market value of a company's total invested capital with its book value ( adjusted for equity equivalents ) and can be summarized as follows:

 

MVA = [(shares outstanding x share price) + (market value of debt)] - book value of total capital invested

 

In layman’s term, the MVA represents the difference between what investors could take out of a company and the total capital provided by shareholders and lenders, and it is thus a measure of management's success in “adding value” to the cash provided by the company's investors (Stern & Hahn said something similar in 1994).

 

However, this is where I have a problem with the practicality of the MVA concept. In substance, the theory states that companies ( whose EVA is regularly positive ) should see “a growing MVA, as investors' confidence grows in the company's ability to consistently deliver a return in excess of the required risk-adjusted rate.” Bull !

 

Question 5: Because book value is almost always equal to par value, have you EVA considered that poorly managed ( as a result, highly leveraged ) but artfully promoted companies would command a laughable premium if such a sophisticated business valuation theorem was applied to explain their rallying price ?

 

3. Net Book Value ( NBV )

 

Total assets minus total liabilities in the company: Simple enough, right ? Wrong – while ‘penalizing’ the business for all its’ known and estimated potential liabilities, this method blatantly ignores the future returns the assets can produce and is calculated using staid ( yes ) accounting practices that do not reflect the real worth of the business to someone who may buy it as a going concern. In a more drastic variation, the NBV could be further reduced by eliminating ‘intangible’ assets ( eg. licenses, brand names ) to arrive at the Net Tangible Asset ( NTA ) position of the business. Question 6: Will Coca Cola ever accept that the name ‘Coke’ isn’t it afterall ?

 

On the flip side, there is a need for pragmatism; if I paid RM 10 million for a business with an NBV of RM 10 million, what is the net benefit of my doing the deal ? Look, I might as well start from scratch to build such a business ( if practical ) – at a cost that I’d dare say, less. I would therefore expect to buy the business at a cost lower than RM 10 million, to cover at a minimum, my financing cost – versus his sweat equity. Of course, if I were to buy it from my brother, out of love, to continue the family tradition in a business that I have been involved in together with the rest of my family, then maybe I would not feel so bad because there is a non-commercial element in the valuation: The thinking behind the recent bank consolidation perhaps?

 

Over the years, I’ve noticed some interesting phenomena in NBV based deals where simply put, caveat emptor prevailed in favour of the Vendor, regardless of the pre-acquisition Financial, Legal, Commercial, Technical and Tax due diligences by the Buyer:

 

a) where the bulk of the assets sitting in the Target was originally purchased from the Vendor’s private companies ( especially in cases where a foreign parent sells machinery to its Malaysian subsidiary, the Target ) and in such situations, the Book Value to the Target was simply the acquisition cost of those asset. Naturally, if the parent had ‘passed on’ some costs ( known as transfer pricing ) by inflating the cost of the asset it sold to the Target, being in a position of control, the parent would have instructed the Target to account for the assets acquired at the ‘inflated’ cost. In the absence of a noticeably blatant inflation, the audited accounts would have treated the acquisition cost as Book Value. Question 7: Now would you consider this audited Book Value as a ‘fair’ Book Value, from the perspective of the Buyer ?

 

b) where the bulk of the specialized assets sitting in the Target was originally purchased from the Vendor’s private companies and in such situations, the Book Value to the Target was simply the acquisition cost of the assets ( see above ). Naturally, if the Vendor had under stated some costs ( again, transfer pricing ) by deflating the cost of the asset he sold to the Target, being in a position of control, the Vendor would have instructed the Target to account for the assets acquired at the ‘deflated’ cost. In the absence of a noticeable understatement, the audited accounts would have treated the acquired cost as Book Value. In the post disposal period, when the Buyer seeks to purchase the same specialized machinery from the Vendor ( because the Vendor is the sole supplier ), Buyer would have to pay, say 50% more than the ‘inherited’ Book Value. Consequently, his cost of production goes up by say, 20%, due to the revised direct manufacturing costs arising from the higher priced machinery’s depreciation. As a result, his business may become unprofitable or generate less cashflows than originally anticipated. Question 8: From the perspective of the Buyer, hasn’t he been whacked by the audited Book Value ?

 

c) Taxes ( both current and deferred ) can wreak havoc on Book Values in an M&A scenario, where the Vendor may enjoy certain tax benefits on specific assets while the Buyer may not, or, when the reorganization of the business for the purpose of the purchase by Buyer, results in the Buyer acquiring the same assets with a different tax base than that recorded, at Book Value, by the Vendor. In both scenarios, his business may become unprofitable or generate less cash flows than originally anticipated as a result of the loss ( or reduced ) tax benefits on the assets inherited. Question 9: Once again, while the audited ‘Book Value’ is the same, the real cash generation Value is different for the Buyer ?   

 

d) Fair value accounting – MASB 21 ( yes, another complex accounting standard that we bean-counters formulated so that we can create more work for ourselves….) requires the Buyer to account for all assets and liabilities acquired at ‘fair value’, even if the Vendor originally did not account for them as such in his audited accounts. Question10: Do you mean the Vendor was being ‘unfair to himself’ by not recording them fairly previously; hey, it isn’t fair to the Buyer now to have to take a write down on a previously audited number ?

 

4. DCF 

 

The fun begins now. DFC uses the future free cash flows of the company ( after all liabilities and estimated costs have been covered ) discounted by the company's weighted average cost of capital ( ‘WACC’ - the average cost of all the capital used in the business, including debt and equity), plus a risk factor measured by ‘Beta’. Beta is a moderation adjustment that uses historic data to measure the sensitivity of the company's cash flows, e.g. through cyclical routines. This means that companies in highly cyclical businesses or with fluctuating cash flows will have a high Beta ( hence, a higher risk weighted discount ) to reflect the volatility of their cash flow. The DCF method appears to be, on the face of it, a persuasive valuation tool because it focuses on the cash generation potential of the company. ( OK really, DCF: If you were to invest RM 2 million today, you would expect to get your original invested capital plus a premium back, by way of yields from your investment, within a reasonable period of time, taking into account inflation and interest rates ).

 

A fundamental assumption in the DCF formula is that the annual cash flows will be distributed to the shareholders in ‘weightage’ to their holdings. However, in the real world, in leveraged acquisitions ( i.e. when you buy a Target using your own money plus Other People’s Money ( OPM )) the Bank will definitely have priority over common shareholders, through what we call a process of subordination of debts. Interest ( or profit ) and principal will always be paid to the Banks before dividends are paid to the common shareholders. The banks may also insist on several other cash flow maintenance covenants that will defer dividend payments to the shareholders. Consequently, the common shareholders’ cash flow is actually delayed rather than annually distributed as the DCF formula presupposes: In reality, the actual return to the common shareholder is much lower than the one used in calculating WACC, solely due to the subordination of cash flow payments. Simply put, the traditional WACC formula overvalues an investment because the subordination impacts are not considered. Question 11:  And, the Beta – after 20 years, I can safely say that it is almost impossible to measure – to test, ask any senior accountant how to calculate Beta ? 

 

As for my then prospective client’s RM 20 million question at the start of this article: If the DCF based value was about market average, why bother. Surely he should expect to get at least 25% more than what the market average was given his sweat equity factor, and the fundamental error in the WACC formula as explained above? And yes, he is now my friend…and a very grateful client!

 

5. Price-earning ratio (PER)

 

PER is simply the number of times the share is priced at compared to the net earnings of the company; meaning that all things being equal, a company with a PER of 5 is, a better buy than one with a PER of 7 because it takes an investor 2 years less to recover her investment from the yields of the original buy.

 

Due to its simplicity, this is probably the most popular evaluation method in Malaysia (notwithstanding its’ many inherent weaknesses ). Listed companies are benchmarked against their peers’ PER to assess their attractiveness. For non-listed companies wishing to apply the PER method, a comparable quoted company / industry sector should be selected. The main difficulty lies in the assessment of  ‘comparable’ company data because differences in audit quality ( it happens ) and accounting policies ( eg. treatment of goodwill, deferred taxes etc ) tend to skewer the PER of the selected companies. Many professionals usually spend much time in streamlining the selected companies’ results to assess a reasonable PER and as a result, open their work to needless scrutiny, especially if the investment recommendation subsequently turned out to be bad….

 

6. Pay Per Page ( PPP )

 

Oh yes. It would be completely remiss if I did not mention one of the more novel methods of valuation: PPP. The PPP methodology seeks to determine the value of, usually, a dot-com portal / vortal by ascribing a $ value to the number of times a page from the website is viewed by normal mortals. The basic premise being that there is promotional value to be gained by the number of times the website is ‘hit’ by surfers. Don’t laugh but in the hey-days of the ‘dot.con’ era, some prominent investment houses in the US were not too averse to subscribing to this novel method of flogging the stock with their clients.

 

I do not wish to argue the (de)merits of the PPP but suffice it to say that based on my ( et tu ? ) net surfing activity ( or should I say, proclivity ), if the PPP theorem held, I  would have contributed substantially towards making billionaires out of many interesting website owners. Inevitably then, Question 12:  2B or not 2B ?

 

What then is a good valuation method ? Oh well, that’s a future article, I suppose. I will, however, leave you with the following thought:

 

It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.

- ( hey, I didn’t say this; Thomas Sowell did )

 

Note

 

Ramesh Rajaratnam is a Chartered Accountant and practices in a large multinational firm. The views expressed in this article are his own and need not necessarily represent the views of his organization or his clients’.