BUSINESS NEWS 04-APRIL-2012

BGS TIMES
THE
LUCIO TAN
EXCLUSIVE!
Shrewd Businessman?
Ruthless Taipan?
An insight into the elusives
billionaire life.
Reported by: CHUA Han En Jonathan TANG

LEE Tsun Ngai Melanie TAN

YEO Tiong Hui
Chlneselllllno
z
nd
rlchest mun ln Phllllnes, wlth net worth
of USsz.8 bllllon
8orn on 'uly ,, ln Chlnu's lujlun
rovlnce.
Moved wlth fumlly to Phllllnes when he wus
u chlld.
Lroed out of unlverslty before gruduutlng
und sturted hls own buslness.
Introduction
Ferdinand Marcos
10
th
President of the
Philippines
December 30, 1965
February 25, 1986
1940: Represented
himself on a court
case and managed to
overturn charge of
murder.
Marcos, in his youth, giving the lawyer face.
LAWYER

April 5, 1963 December 30, 1965
Marcos, as a president, giving the duck face.
Senate President
Lucio Tan (left) and Ferdinand Marcos
3 main business transactions with
Lucio Tan

Formation of
cigarette monopoly

Lifted ban on establishment of
beer brewery

Personal involvement in the acquisition of
General Bank and Trust Company





Nature of Transaction
Lead to the formation of cigarette
monopoly

Formation of Fortune Tobacco in 1966
Nature of Transaction
Lifted ban on establishment of beer
brewery

Formation of Asia Beer Brewery in 1982

Nature of Transaction
Acquired General Bank and Trust
Company at PHP310b (S$9.07m)

General Bank and Trust Company is
renamed to Allied Bank, 8
th
largest
bank in the Philippines

Lucio Tans Prerogatives
Tax concessions


Monopoly
Strategic allocation
of individuals in
governmental sectors
Impact on Competitors and Society
!"#$%&'"() +",-%'.
Formation of Asia Brewery
led to direct competition
against San Jose Brewery

Welfare
Disadvantaged with higher
tax rates

Tobacco monopoly drove
tobacco prices down,
affecting the livelihood of
farmers

Higher prices for consumers

Why Did Marcos help Lucio?
He values friendship

Later investigations show that Marcos
owned 60% of Lucio Tans enterprises

Helping Lucio Tan equates to benefiting
himself
Lessons Learnt
Having good
relationships with
influential people aid
business transactions


In order to get license
to operate, need to
accept the terms of the
political establishment

13
th
President of the
Philippines

June 30, 1998
January 20, 2001

Joseph Estrada
Born on April 19, 1937
Began a career as a drama actor.
Estrada is the first celebrity to be a president.
First mustached president.

Long term relutlonshljfrlendshl, slnce before
Lstrudu wus u muyor ln Sun 'uun
Luclo funded .b esos for Lstrudu's cumulgn
ln return, Lstrudu heled to uolnt Ellurlo Luvlde 'r. us
the C' of the Phllllnes ln 8

Lstrudu wus lnstrumentul ln the dlsmlssul of Luclo's court
cuse whlch wus the country's blggest tux evuslon

1.
2.
3.
4.
Lucio & Estrada
Nature of Transaction
Stopped aviation
agreement between
the Philippines and
Taiwan
Eva Air & China Air
accused of poaching
PALs passengers
Implications for Lucio
Lucio elected as president of the
Federation of Filipino-Chinese
Chambers of Commerce and Industry
Tax evasion case against Fortune
Tobacco Firm
Hailed as hero for keeping
PAL afloat
Honoured as major taxpayer
Impact on Society
Lucio distorted the democratic election
process with resources given to preferred
candidates
Vested interests placed above those of the
nation
Termination of air agreement caused huge
losses for many; significantly damaged
bilateral relations with Taiwan
Lessons Learnt
Need for foresight
Betting on the Right Horse
Importance of gaining
political allies in a system of
patronage and clientelistic
policies
Halting or derailing of
business transactions due
to vested interests
Lessons Learnt
With vested interests,
regulatory institutions
become susceptible to
reversals & inconsistent
policies
Need for businesses to be
exceptionally sensitive in
such politically unstable
environments

December 1998, nine counts of
tax evasion was filed under
Judge Alex Ruiz against Lucio
Tan,
10 officials of his flagship firm
Fortune Tobacco Corp and 57
executives of nine firms which
Tan allegedly used as conduits
to avoid payment of correct
taxes from 1990 to 1992.
Tax Evasion Case
"#
$#
%#
&#
: Presldent Lstrudu wus ugulnst ursulng the
tux evuslon cuse fled ugulnst Luclo.




1he Leurtment of 'ustlce usked severul tlmes for ermlsslon to
ursue the cuse but Presldent Lstrudu mude vurlous excuses.
Requested thut the LC' wult for hls return from South loreu
to glve ermlsslon
Leluy ln muklng u declslon on the cuse resulted ln the cuse
belng fled lute.



Favouritism of the Bureau of
Internal Revenue
President Estrada allowed Tan to name the
new BIR Commissioner in 1999

Beethoven Rualo, a close associate of Tan
was chosen for the role.
Within 5 months of
Rualos appointment, he
dropped two tax evasion
charges against Tans
firms which the previous
BIR official had pursued

Allied Bank for PHP 338
million reduced to zero

Fortune Tobacco for PHP
8 billion reduced to PHP 5
million respectively.
In September 1999, Tan filed
a motion asking the court to
dismiss the DOJs move on a
technicality- its alleged
failure to file the petition for
review on time.

Government cannot impose
its will in collecting taxes
from major taxpayers in the
country.
Lessons Learnt
Luclo mude !"##$!%&"#'
wlth lnfuentlul eole ln
ower who rotected hlm
us u wuy of sufeguurdlng
thelr own lnterest us well.

Luclo's '&#!$(&%) ln forglng
close relutlonshls wlth
the lndlgenous ellte
bolstered hls rotectlon
ugulnst the luws of the
country.

A common theme emerges from his series of transactions with the
government:
Provides personal benefits to politicians or government officials in
return for political favours towards his businesses
Key Question:
How beneficial is this approach to
Lucios firms & what are the
alternatives?
Termed rent seeking model in economics
Capturing economic rent through manipulation of the
economic or political environment, instead of economic
transactions and the production of added wealth

Evaluation of Strategy
Evaluation of Strategy
Resource dependency theory
Pfeffer and Salancik argue firms rely on the external environment
for resources and support to survive
market factors
(technology,
efficiency)
Non-market factors
(social, legal,
political)
Influencing gives an opportunity for
gain or mitigating harm via policies,
laws, court rulings
Controlled by the government/public
bodies
Resources include:
Incentive present but decision considers the:
In developing countries, tendencies
for
Extensive, sometimes arbitrary
government intervention
Variable policy decisions (High
uncertainty)
Magnitude of impact of government action on
firm
Benefits of government influence are
high
Implication:
In developed capitalist countries,
tendencies for
Limited government
intervention
High degree in policy
consistency
Benefits of government influence are low
In Lucios case, the Philippine's
government clearly falls here
Well documented cases of the
wealthiest businesses directly
benefiting from links to the political
elite
Critical for large firms to influence the
government
Government officials expect
economic rent(inducements) for
support or typical regulatory
approval
In developed nations such as
the U.S., lobbying or peak
associations are accepted as a
common routes to influence
national policies
In developing countries like
China & Russia, formal
institutions are weak & informal
networks are essential to
economic activity.
Institutional theory
States complying with norms and routines in the social, political
context provides legitimacy for the firms survival
Varies from country to country
Lucios strategy requires an
understanding of the local socio-
political context
Evaluation of Strategy
Socio-political structure of Philipines:
During Marcos Era (dictatorship)
Legitimacy/License to operate in state
controlled industries (e.g. tobacco &
alcohol) depended on
personal access to Marcos
Willingness to make illegal payments to
Marcos
Otherwise legitimate private businesses
were eliminated & state monopolies handed
to his cronies
From a profit max. viewpoint,
Not only beneficial to gain
personal access to and serve
as a client to government
norms
Essential for firms survival
Evaluation of Strategy
Socio-political structure of Philipines:
Post Marcos
State reverted to earlier system
Characteristics:
Political factions are alliances based on
patron-client, kinship and personal networks
instead of ideology
Public office commonly sought for promoting
personal and factional/patrons interests
Elections campaigning
Patron politics
Chain of patron-clients down to
municipal players who can influence local
votes
Machine politics
Vast financial resources required to maintain
loyalty though inducements (e.g. money, political
appointments)
Creates culture of endemic
corruption, prevalent
practice of exchange of
political favours for
financial gain
From a profit max.
viewpoint,
Wealthiest Filipino
businesses have
benefited from favours
from corrupt political
norms
Evaluation of Strategy
Socio-political structure of Philipines:
Downside of Lucios approach
Political risks:

Political struggle involves maintaining ones
resources while undermining the resources of
rival factions

Ones business fortunes is tied with ones client

Betting on the wrong politician can be costly
In 1992 Presidential elections, Lucio
supported Ramon Mitra against Fidel Ramos
Lucio Tans firms were met with hostility from
the Ramos administration (BIR tax case)
Excessive reliance on
personal access &
political favours
Advantages gained may be
short run.
Limited success abroad
for Lucio Tan
Failure of Fortune
Tabaco or Asia Breweries
to develop strong
competitive advantages
Uncompetitive
internationally, hampers
expansion
Social pressure
Lucios practices deeply unpopular with public,
possible catalyst for crackdown eventually
Evaluation of Strategy
Socio-political structure of Philipines:
Downside of Lucios approach
Ethical dilemma
Even if profitable, compliance with local political norms
are ethically undesirable.
Prescription for firms in Lucios position
Ethics
No unlawful activity
government influence
Resource dependency theory
Influence government?
Yes
Rely on personal access (legal)?
Engage in illegal political practices
Doubtful
Ethics
Evaluation of Strategy
Socio-political structure of Philipines:
Downside of Lucios approach
Ethical dilemma
Even if profitable, compliance with local political norms
are ethically undesirable.
Prescription for firms in Lucios position
Legal
Resource dependency theory
Influence government?
Yes
Rely on personal access (legal)?
Engage in illegal local political
practices?
Ethics
Profit
No/Doubtful
Illegal High risk, short
term returns
Yes
Firms should not neglect their
core function:
Focus on improving the
economic competitiveness for
sustainable profits
Evaluation of Strategy