CLOSURE OF MICROPOLIS

Mr Inderjit Singh asked the Minister for Finance to inform the House (i) what led to the closure of Micropolis just under 2 years after Singapore Technologies acquired the company; (ii) what went wrong in the process of the acquisition; (iii) how much money was lost from the acquisition to the closure of the company; and (iv) where did the money for investment come from.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, Singapore Technologies saw opportunities in the hard disk drive business of Micropolis and decided to buy over Micropolis' worldwide hard disk drive business in April 1996. The new Micropolis management, which led the acquisition, had expected to turn the company around from its previous losses and re-establish it as a profitable high-end disk drive manufacturer.

Following its acquisition by Singapore Technologies in 1996, Micropolis refocused its range of product offerings and changed its market strategy to focus on the original equipment manufacturing (OEM) sector of the market. With the phasing out of obsolete products and the launching of new products, Micropolis managed to secure several new OEM customers. Micropolis also continued to reduce operating losses throughout 1996, and turned in a profit for the month of December 1996. Therefore, although total operating losses amounted to S$76 million in 1996, Micropolis was actually showing gradual improvement in its performance.

However, the high-end disk drive industry took a dramatic downturn in 1997, with the aggressive entry of several major players. As most of you may know from the various press reports, there was severe over-capacity in 1997 as a result of simultaneous investments by existing and new players. This resulted in over-supply and intense price competition. Prices were dropping at 16% to 18% each quarter in 1997, some three times the normal rate of 5% to 6% price erosion each quarter as manufacturers competed for market share. Industry analysts believed that the disk drive industry is in the throes of a major adjustment stretching into 1998. The leading players have either sounded alarm over their earnings prospects or have taken steps to consolidate their operations, including closing plants, laying off workers or delaying new investments. In fact, there are reports in today's papers regarding Seagate's, the largest disk drive manufacturer in the world, plans for such changes this year.

Throughout 1997, Micropolis' operating losses mounted, as sales continued to fall below projections and product margins were eroded faster than expected. There was excess inventory in the market. Micropolis was unable to turn around in 1997. Operating losses progressively worsened in the first half of 1997. By mid-1997, Micropolis was already exploring various alternatives for partnerships or mergers with other market leaders but without success. Prospects for recovery worsened considerably with the sharp change in the competitive environment as 1997 progressed. By October 1997, the operating loss for the year had reached S$200 million. Having reviewed the company's business performance, resources and prospects, the Micropolis Board of Directors was left with no choice but to wind up the business.

What went wrong in the process of the acquisition?

We have to accept that risk-taking is part and parcel of all investment decisions. In acquiring Micropolis, Singapore Technologies had believed that the new management could turn the company around by focusing on the high-end niche market which had been a profitable industry segment. Singapore Technologies carried out a four-month due diligence with its external consultants on the investment before the acquisition. As it turned out, the severe over-capacity in the high-end disk drive market was not anticipated by Singapore Technologies and was the main reason which made this investment a loss-making venture.

How much money was lost from the acquisition to the closure of the company?

The company is under liquidation. This means that the financial affairs of Micropolis are now independently and professionally managed by experienced liquidators from reputable international firms. They will determine how best to recover and dispose of the assets of the company in the process of liquidation.

Based on the Statement of Affairs lodged by the Liquidators of Micropolis in December 1997, Micropolis does not have sufficient realisable assets to fully repay the unsecured creditors, including Singapore Technologies. Recovery expectation is about 10% of the debts claimed.

Singapore Technologies has S$80 million as --- 1.30 pm

Mr Speaker: Order. It is 1.30 pm. End of Question time.

[Pursuant to Standing Order No. 21(3), Written Answer to Question No. 9 on the Order Paper is reproduced in the section, "Written Answer to Question for Oral Answer Not Answered by 1.30 pm" (Cols. 111-4). Question Nos. 10 to 27 have been postponed to the sitting of Parliament on 15th January 1998.]