SMALL and medium-sized enterprises (SMEs) which require fresh ideas to grow their businesses can win $150,000 each to enable them to hire professional consultants. OCBC Bank is offering the sum of money to three SMEs, in return for an opportunity to take a stake in them in the future.
"Most companies are very busy, have a lot of things on their plate and have very little resources," said OCBC's head of group investment banking, Gan Kok Kim, who is on the judging panel for the bank's Mentorship Consulting Prize award.
"If we give SMEs something like this, they would then have the capacity to do something they might not typically consider or have the luxury to consider, like expanding to certain countries, product development, research and development, maybe even look at operational efficiencies," he added.
SMEs which receive the award must look for external professionals who are not related to the company. They can be consulting firms or retirees who used to work for listed companies and have the relevant industry experience, Mr Gan noted. OCBC does not prescribe how they go about finding consultants or what the consultants should do.
Help to find consultants
"It will differ from company to company and industry to industry. We will assist them if they are not able to get consultants, and can direct them to where they can get advice," Mr Gan said.
OCBC will have the first right of refusal to participate in all equity fund-raising exercises by the winners. This will last until the winner's business or assets are listed on a stock exchange or are sold - and OCBC does not intend to control the business.
"These are companies with high potential, so we want to help them in their financing requirements," Mr Gan said.
Financing could come in different forms, he noted.
SMEs which do not want to part with too much of their equity can opt for mezzanine financing, commonly described as a debt and equity hybrid.
Mezzanine financing can take the form of preferred stock, subordinate debt or convertible bonds.
"Compared to issuing equity, a convertible bond is cheaper," Mr Gan said. "We could also do high-yield loans with equity features and other structures."
For example, offshore marine company Otto Marine received US$20 million in mezzanine financing in 2012 to help with its acquisition of Australian oil and gas firm Go Marine Group.
The loan is for three years. It allows OCBC to participate in the eventual initial public offering of Go Marine by converting the mezzanine financing to a subscription of a minority stake of the listing entity.
The bank's Mezzanine Capital Unit, which supported the deal, also went beyond funding Otto Marine's acquisition, Mr Gan said.
It helped Otto Marine conduct due diligence and market study, advised the company on regulations, gave advice on operational improvements and helped determine if the acquisition was value-accretive.
Singapore's 170,000 SMEs have come under the spotlight in recent years as the government pushes through a plan to restructure Singapore's economy to focus on productivity. This is to reduce SMEs' reliance on foreign labour and raise average wages.
Observers have said that some consolidation among SMEs is inevitable as inefficient businesses are forced out of the market by rising costs.
Members of Parliament in the recent Budget debate called for more government assistance for SMEs which want to restructure or expand. Business associations have also said that SMEs should consider linking up with other firms for economies of scale and survival reasons.
But only about 50 SMEs have made use of a government scheme implemented in 2010, which grants tax allowances on transaction costs incurred in a merger and acquisition (M&A).
Mr Gan said acquisitions can be a quick way of expanding a business, and SMEs can consider going either upstream (acquiring control over their raw materials supply chain) or downstream (controlling the processing and product distribution part of the chain).
Consultation can help assess the viability of an acquisition, he said.
OCBC can advise, for example, on the foreign countries it operates in, such as Indonesia, Malaysia and Greater China.
SMEs looking for acquisitions in Indonesia would have to be prepared to pay higher valuations because Indonesia is a high-growth country, Mr Gan said. They also need to be wary of some of the pitfalls in terms of clearing regulatory hurdles.
"We would prepare them in terms of the type of valuations they would expect, and how they can extract value from the companies they are buying," he said.
For China, it is more likely to find a large Chinese company going overseas to secure upstream resources in developing countries, than to find companies buying Chinese firms, Mr Gan said. Chinese companies are also looking for distribution capabilities, brands and technology, he added.
Malaysia, meanwhile, is in a more mature stage of development compared to either China or Indonesia. Acquiring businesses there would be more of an "add-on", he noted.
"People look at Malaysia in terms of completing their strategy around South-east Asia."
Mr Gan said the bank does not expect the consulting prize winners to be just doing M&As, however, as they would have plenty of opportunities for organic growth within their own markets.
"If you're planning on acquiring, you need to look at your sources of funding," he said. "If you don't have the financial capability to support acquisitions, then you may need to bring in other partners in joint ventures, or finance it through other means, not necessarily direct equity. In those cases you have to see some dilution," he said.
A share swop structure can also work such that the company one is acquiring then becomes a partner, he said.
Ultimately, the purpose of the award is to help SMEs which might not have the network in place to see how things are done differently.
"There is no guarantee with these kinds of things. But by giving them this resource, the opportunity for value creation would be much better," Mr Gan said.