Monday, February 16, 2009

Troubled Company Acquisition and SATYAM Scenario

Stock Market has been grappling with this SATYAM Fiasco for a long time than any seen before and media news is the one to go by, then news for the past few days have been both positive and negative. Let me list out few.
Positive Signals

1.SEBI has amended the takeover rules where a suitor can’t make an open offer if an acquirer has announced an open offer already.Also, they have relaxed norms for the companies where new board has taken over.
2.World Bank has said that SATYAM ban might get reviewed if the company proves that they have taken a corrective action and it is good news for speculation. But I wonder why they did not ask WIPRO to take corrective action?
3.Restatement of account before March 2009.

Negative Signals

1. Few Clients including Merrill Lynch are shifting projects to other IT Majors
2. If they decide to restate the account for many years, then it will take more time.

I am not going to dwell much on media news and instead I will focus in this article about troubled company acquisition process, its benefit and pit falls so that it might be useful if there comes a similar situation in future.

Troubled Company Acquisition process

Buying a struggling company is a complex process and the complexity depends on the reasons behind the problem. For example, assume a company called ABC Oils and the company is doing everything right and the management is honest, but somehow they do not generate good revenue either due to bad economies of scale or inefficient targeting. The acquisition process here would be fairly simple. Why? Because, in this example, strategic acquirers should have been hearing this news for few months and they might have spent enough time in analyzing what the acquisition would do for them, its benefits and problems. The buyer would be in a better position to confidently buy it as he knows that additional capital investment and use of parent marketing capability would make the struggling company viable. But the process becomes complex when things go in the opposite direction.

Incase of SATYAM, there was no problem as such and it was created by its own Chairman due to his greediness and lack of business ethics. Of course, he would have started the SATYAM with good ethics and he should have been a nice person for sometime. I have a feeling, he committed the mistake once with help of his coterie and he became confident to do more such acts as there was no adequate company law to identify such things. Since, he knew our inefficient legal process and the tolerance level Indian people have got, he just wanted to build an infrastructure empire by diverting some “Free” cash and finally when he was cornered, he simply put himself in prison so that he can spend his retirement life with adequate security. Here the problem is its suddenness. Of course the fraud has been going on for many years but no one knew it and there was no buyer prepared to this kind of situation. Also, no one knows the real complexity of Satyam problem unless investigating agencies find out. Raju won’t come out with clear facts as it will hamper his legal process and it is up to the auditors to unearth what has been going on.

Hence, potential suitors do not have enough time to analyze SATYAM’s strategic fit to them and also they do not have clear view on the financial position. That’s why it has become more complex even though SATYAM’s business structure remains strong. In my view, I do not think it will happen any soon unless it comes for sale at a real cheap price. Would you or your family buy a business which does not have any credible account standards? No, right? It is as simple as that. Unless suitors become confident that it would be a value addition, they won’t buy it in the current scenario as they have seen many takeovers in the past year going futile. Majority of the companies have seen value erosion in the past year after the new acquisition and Tata Motors has lost 80% of its value after the Jaguar-Land rover deal. Let me go through what potential suitors look for and what they bring to the deal.

What potential buyers look for?

Any individual let alone potential buyers will look for some benefit in return to their interest and investment and the case in SATYAM is no different here.

1.Strategic fit
2.Attractive product extension
3.Reach i.e New clients, channels, marketing avenues
4.Sudden scenario where a company is available for cheap price for “Good” reasons
5.Buyer gets into a situation where they do not have any other situation but to protect investment by buying it. Ex. L&T

What they need to know before buying?

Companies simply do not go and buy for the sake of making an empire. They should understand the complexities involved in it and here are few things they should know.

1. Comparative advantage and cost efficiency
2. New capital investment needed to reorganize the struggling company
3. Margins and technical capability
4. Legal troubles the company associated with
5. Debt, the problematic company has
6. Conflicts of interest in pay structure between parent company and new company
7. Day to day operations and clients
8. Shareholders in the company
9. Sufficient time to analyze the financial statements

What a buyer would bring to the struggling company?

1. Freshness
2. Win-Win business situation or synergy (In fact The name “SYNGENTA” came from Synergy in Genetics” after the merger of Geneca Agrochemicals and Novartis Agribusiness)
3. New Capital Investment
4. Effective Management

Buyer, benefits and problem

After evaluating all the details, a buyer would come to the conclusion to buy it but has some additional things to be considered as well. Not many buyers have cash in hand to buy new companies. Hence, how they are going to finance it? Is it going to be a leveraged buyout or all cash transaction or stock transaction or combination of all these things? So, it depends on the buyer’s particular situation. In fact he would go ahead and buy if he at least knows there would not be any potential value erosion to his parent company in the long term due to the acquisition. Then they have to get the approval of shareholders and it should benefit them. As I said benefits might include new clients, technically efficient employees, cost efficiency, higher margins, new or additional marketing channels, infrastructure etc. But they might also bring undisclosed problems like Merrill Lynch problem with Bank of America or general market view on that deal. If the market does not view the deal as a prospective one, then it will be catastrophic disaster to buyer particularly.

SATYAM Scenario

After all we have discussed a bit regarding troubled company acquisition and we should be able to piece together who has in them to buy SATYAM in the normal scenario. But SATYAM case is unique where even SEBI is granted permission to enquire RAJU after two weeks. It might be a good exercise for you as well if you analyze on your own to identify the buyer based on all the things pointed out earlier. In my view, L&T should be the one desperately looking for some benefits out of this deal whether they buy it or not. They are in a position to protect Rs. 575 crore investment and it depends on the deal. As a potential buyer, SATYAM strategically fits in to its InfoTech business. But they would want to make sure that the acquisition does not turn out to be a disaster for them. If they buy SATYAM, it might well take away the focus from its core engineering business for many reasons. In my view, they would have a significant role to play in this deal whether they buy or not. Hope things do not change dramatically.

Market Buzz on Acquisition:

SUN Pharmaceuticals has been sitting on cash and the news is it is looking to acquire new companies that fits to their business expansion.

1 comments:

Penny Stocks July 28, 2010 at 5:12 AM  

Excellent tips here, well done for sharing this information...

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