Why has TSMC been able to grow rapidly over the years? Morris Chung-Mou Chang: I reject "tempting" decisions. I won't do what most people want to do.

In 1988, the second year after TSMC was established in Taiwan, the first "Management Buyout" case in financial history occurred in the United States.

The CEO of a large-scale listed company, RJR Nabisco, formed an alliance with a "financial institution" in order to increase the company's stock price and increase his shareholding ratio, and attempted to acquire the company at a price higher than the current market price. All the shares of the company are on the market, and they are still run by themselves: this is the so-called "management buyout".

What's the outcome of this case? The stock price was shot up, but the acquirer was not a financial institution aligned with the CEO, but another "private equity". The CEO instead lost his position. Although this "management buyout" case was not successful, many such cases have been successful since then.

What I didn't expect was that the possibility of "management buyout" would also happen to TSMC.

These 4 reasons prompt financial institutions to conduct "management buyouts" from TSMC

2006 was a record-breaking year for TSMC, with revenue of nearly 10 billion U.S. dollars and operating net profit of nearly 4 billion U.S. dollars. At that time, the market capitalization (share price per share multiplied by the total number of shares) exceeded 50 billion U.S. dollars.

On February 2, 2007, Hsueh-Jen Sung, a partner of Goldman Sachs Group, came to visit and suggested that Goldman Sachs, combined with other financial institutions and loans from other banks, could form an alliance with TSMC's management to conduct a "management buyout". Soung's rhetoric is:

1. Invest a total of US$70 billion to acquire all TSMC stocks on the market, except for stocks already owned by management. About half of this US$70 billion comes from loans.
2. The benefit to management is that the leverage of loans can increase our shareholding ratio.
3. The interest on the loan (approximately 8% at the time) could be paid with the cash saved by not issuing dividends.
4. The company's capital expenditures, employee bonuses, etc. can remain unchanged.

After listening to Sung's words, I agreed to consider it. A week later, I went to San Francisco to give a lecture as planned and then stopped by New York. Henry Cornell, a senior partner at Goldman Sachs who specializes in such M&A investment cases, and his deputy Rich Friedman, also a senior partner, came to my home in New York to discuss the case. Their words are generally consistent with Sung's, but they seem to be slightly more reserved than Sung about whether the case can be completed.

After that, I went from New York to Frankfurt, Germany, to attend the SAP Business Leaders Conference, then returned to New York, USA, and then to Boston to participate in the MIT Board of Governors and the "Visiting Committee" of the Department of Economics, and then returned to Taiwan. It was March 4th when I returned to Taipei. During this nearly month-long trip to the United States and Europe, I often thought about this "management buyout" case when I had free time, so when I returned to Taiwan, I had quite a few opinions on the case. However, we still asked the chief financial officer of TSMC to do numerical analysis and had several discussions with CEO Rick Tsai. Tsai expressed opposition to the case when he learned about it in February. He continued to oppose the case after I returned to Taiwan in March.

Morris Chung-Mou Chang: We won't do it for two reasons!

On March 8, Cornell came to Taiwan and came to my office with Hsueh-Jen Sung to listen to my decision. I told them: We won't do it! Sung was a little disappointed, but Cornell looked relieved and told me that usually the management is very enthusiastic about doing a "management buyout", and I am one of the rare ones who is unwilling to do it.

In fact, the reason why I don't want to do it is very simple. There are only two main ones:

1. Financial planning is too reluctant

The so-called "employee dividends, capital expenditures, and R&D investments remain unchanged, and only the dividends are converted into loan interest" is simply impossible. This judgment was proved to be correct afterwards, because the interest paid on the loan of more than 30 billion US dollars at an interest rate of 8% was indeed more than the dividends paid by TSMC in the following years.

In addition, if a "management buyout" is carried out, TSMC will become an unlisted company, and the only channels for raising funds will be shareholder capital increases and borrowings. Because the number of shareholders is limited and huge capital has been invested, there is little chance of capital increase. And because the amount of borrowing is already very high, the amount that can be borrowed is limited. Moreover, the group of banks that originally lent us more than 30 billion US dollars will inevitably require strict loan conditions. Not only will most of the assets have to be mortgaged to them, but there will also be many requirements for financial ratios. As a result, if there is any change in operating net profit (in fact, the market was sluggish the following year in 2008), it will definitely affect our capital investment and R&D investment.

2. "Management buyout" is a term that is very tempting to management, but the real acquirer is the financial consortium. If the acquisition is successful, the company's sovereignty will also be in their hands.

I have been paying attention to similar cases since the RJR Nabisc case in 1988. In the 1990s, I had the opportunity to consult with the manager in charge of such investments at Morgan Stanley. He said: There is a sentence that I still remember: "Once management agrees to participate in a 'management buyout', management loses control."

In short, in March 2007, I felt that TSMC had great potential in a publicly listed environment. If you do a "management buyout", your hands and feet will be tied up. As for the low management shareholding ratio, then increase the company's market value.

In hindsight, the decision to "not conduct a management buyout" in 2007 was definitely the right one.

Two or three years later, we saw opportunities for market growth and quickly increased capital investment by almost three times. Not only did we spend all our own cash, but we also borrowed debt. Of course, the corresponding result was rapid growth for many years—if we When we did a "management buyout", it was impossible to reap such profits and growth.