BUSINESS

FORGING NEW LINKS

AN ONTARIO FIRM IS TRANSFORMING ITSELF INTO A GIANT WITH HELP FROM HONG KONG AND CHINA

TOM FENNELL February 20 1989
BUSINESS

FORGING NEW LINKS

AN ONTARIO FIRM IS TRANSFORMING ITSELF INTO A GIANT WITH HELP FROM HONG KONG AND CHINA

TOM FENNELL February 20 1989

FORGING NEW LINKS

BUSINESS

Moving money out of Hong Kong—and China’s reach—is rapidly turning a small suburban Toronto firm into a giant. Until a year ago, International Semi-Tech Microelectronics Inc. of Markham, Ont., was a tiny designer and manufacturer of personal computers whose revenues had never exceeded $27 million in a single year. But last week, it was battling to complete its fourth major acquisition in just 11 months—a $264-million buyout of Shelton, Conn.-based SSMC Inc., the maker of the famous Singer sewing machines. Behind the expansion is one of Hong Kong’s richest and most flamboyant men, gamblingcasino magnate Stanley Ho, who is racing to diversify abroad before 1997—the year that Britain returns the booming colony to China. If it takes SSMC, Semi-Tech will have turned its link to the tycoon into a worldwide conglomerate with $1.8 billion in annual revenues. Said Semi-Tech president James Ting: “When Ho invests in something, things happen.”

Semi-Tech was created in 1981 by the firm’s

AN ONTARIO FIRM IS TRANSFORMING ITSELF INTO A GIANT WITH HELP FROM HONG KONG AND CHINA

hard-driving Ting, 38, a Shanghai-born, Canadian-educated engineer who says that he wants to “build an Eastern-style business in the West.” His models are huge Asian conglomerates—including Japan’s Mitsubishi Corp.—in which manufacturing, resource, trading, banking and insurance companies support one another’s activities under one corporate roof. Ting has already struck an unprecedented

accord with China, where Semi-Tech is now developing consumer products that will be sold by the firm’s 87 Consumers Distributing Co. Ltd. outlets in the eastern United States—the third-largest catalogue-showroom company in that country. And with Hong Kong billionaire Ho moving more and more money into Canada, including his investment in Semi-Tech, he might well succeed. But SSMC stands as a major test of Ting’s strategy, and some analysts say that his aggressive expansion might be spinning out of control. Said the publisher of a leading Toronto-based high-tech newsletter, Graeme Kirkland: “If he’s smart, he’ll stop and consolidate. He’s got a real monkey on his back if he tries to keep growing.”

Ting cofounded the company with Frank Holmes, his engineering PhD thesis adviser at the University of Toronto. They designed a small personal computer called The Pied Piper, which Semi-Tech manufactured in Hong Kong. Ting also negotiated a unique agreement with the government of the Chinese province of Shenzhen in October, 1986, when Semi-Tech

and the Shenzhen Electronics Group (SEG) entered into a $270-million research and development deal. The plan, which will eventually allow SEG to manufacture microcomputers in Shenzhen, is the largest ever signed between a Canadian private-sector company and a Chinese firm. SEG, in turn, took the unusual step of purchasing a 5.9-per-cent interest in SemiTech’s Asian manufacturing branch, SemiTech Microelectronics (Far East) Ltd.

Ting’s biggest break in Asia occurred in 1987 when his Chinese connections and business plans came to Ho’s attention. Tall, European-looking, with a long nose and quizzical bushy eyebrows, Ho controls a multibilliondollar fortune. He is one of Hong Kong’s richest men and runs his international operation from his penthouse suite on top of his twintowered Shun Tak centre. The buildings stand above the colony’s major ferry terminal, which

Ho also owns and operates. Thousands of people leave the terminal daily to communities around Hong Kong Island and to Ho’s casinos in the Portuguese colony of Macao—a 45-minute ferry ride from Hong Kong on the Chinese mainland. Ho operates four hotels and five casinos in Macao, which produce nearly $600 million annually in revenues.

In addition to his Semi-Tech investment, Ho has made a more personal investment in Canada. His wife, Lucina, has moved to Toronto, where the Hos recently paid $5.5 million for a palatial brown-and-red brick house in Toronto’s exclusive Bridle Path area. And last Sep-

tember, Ho bought Le Méridien Vancouver hotel in the West Coast city for $47.7 million. A few days later, he bought the adjacent apartment hotel, La Grande Residence, for $22 million. As well, Lucina Ho and her sister Eliza Kuok have invested $450,000 in KHK Fashion Group Ltd., an upscale clothing manufacturer in Toronto.

Like most of Hong Kong’s wealthy residents, Ho is trapped between the Communist takeover of the colony in 1997 and his own inability to move all of his assets out of the colony. As a result, Ho says that he is looking for investments abroad while also diversifying into China. He added that by making Hong Kong-based companies economically important to China, that country will be reluctant to tamper with the colony’s successful corporate structure in 1997. And by teaming up with Ting, Ho was able to meet his twin goals: he can move some of his money to North America, while demonstrating his long-term faith in the colony by investing there. Added Ting: “For Hong Kong to be important to China after 1997, it has to be through international trade.”

Ting first approached Ho as an investor in August, 1987, and in March, 1988, Ting asked Ho to become chairman of Semi-Tech in recognition of Ho’s influence in the colony. Ting’s gamble worked, and the company was able to raise $55 million by selling 49 per cent of its stock to Hong Kong investors. Ho and Cheng Yu-tung, another Hong Kong billionaire, each bought $8.1 million worth of stock.

With Semi-Tech Far East’s link to Hong Kong now firmly in place, the firm moved quickly to close a deal to purchase 87 Consumers Distrib| uting stores for $137 million, á The outlets sell a wide range z of discount consumer prodg ucts from the large warehouse operations on the U.S. East Coast. Although the action seemed out of step for a computer firm, it fit perfectly into Ting’s plan to use China’s cheap labor to manufacture products to sell through the chain. And last month, that strategy became clearer when Semi-Tech announced that it had concluded yet another joint-venture agreement with SEG for the design and development of consumer electronic products, including VCRs and TV sets for the Consumers chain.

The Chinese will manufacture the appliances and private-label brands for Consumers and other companies, such as Sears Roebuck & Co., which could ultimately be sold under the SSMC label. That is why the acquisition of SSMC

is critical for Ting. SSMC manufactures and distributes Singer appliances in more than 100 countries around the world—the second-most recognized brand name in the world, after Coca-Cola. Semi-Tech vice-president Michael List said that the agreements with the Chinese province “give us the ability to source and manufacture product on a very economical basis in the Far East and a 100-country distribution network. It also gives us a very famous name.” Added Kirkland: “Singer is the best possible fit. Through his contacts, Ting has captured a worldwide distribution system.”

And while Semi-Tech Far East was filling out its end of Ting’s strategy, the firm’s Canadian operation also prospered, taking over two Toronto computer data processing companies that Ting said would give Semi-Tech a built-in market for its computers and a steady cash flow. Last March—three weeks after the announcement of the Consumers purchase— Semi-Tech purchased the first company, Datacrown Corp., the computer services division of Crowntek Inc., for an undisclosed sum. Then, in June, Semi-Tech acquired Canada Systems Group Ltd., Canada’s leading provider of data processing services, for $56.5 million. Through the two takeovers Semi-Tech captured more than 700 clients, including T. Eaton Co., Stelco Inc. and the federal government, as well as many smaller companies.

Despite Semi-Tech's connections in Hong Kong—and its remarkable deal with China— and Ting’s aggressive game plan, the firm has only been able to raise $5.1 million through its initial public offering of shares in Canada in December, 1986. But Ting said that he does not need the support of the Canadian investment community: “They were looking at something far away. They did not understand. You have to deliver the results before they will support you.”

Meanwhile, last week, two competing bidders surfaced to complicate Ting’s bid for SSMC. One is Bilzerian Partners, a U.S. investment firm that already owns 27 per cent of SSMC. The other is a Malaysian investment group that owns about 10 per cent. Last Friday, SSMC’s stock on the New York Stock Exchange closed at $32, $2 higher than SemiTech Far East’s offer. But Ting expressed no concern about his rivals’ actions, telling Maclean’s: “This could be someone making some noise. Someone bidding up the price.”

And if the SSMC acquisition is successful, analysts say that Ting will have his hands full just trying to manage his new interests. Said Mark Lawrence, an analyst with PrudentialBache Securities Canada Ltd.: “Now, they’re going to have to tie it together. Investors are wondering if he can do that profitably.” But Ting appears so confident about the future that he does not want to reduce his ownership stake in Semi-Tech through a large share-offering in Canada. And if he has to, he can always look to Hong Kong, where the colony’s richest businessmen are looking for secure investments in North America.

TOM FENNELL

JOHN DALY