Acquisition governance


While on the subject of governance, lets take a look at acquisitions in corporate India.  Many acquisitions are of companies we never heard of, and probably with good reason.  They’re done to

(a) justify taking in investor money – PE or IPO

(b) give a struggling CEO breathing space – and a diversion – with the board

(c) siphon off money through a company that is owned directly or indirectly by the promoter

(d) make a CEO feel good about himself – and provide a talking point for the next party

At B-school, I tended to be dismissive of these kind of arguments – believing in the efficiency of capital markets and how they’d punish this kind of behaviour.  But, in reality, all this does happen.  And scarily, a lot of people engage in it.  What good is a CEO who doesn’t buy-out another company every few months?

So, what I’d like to see is a little more governance around acquisitions made by listed companies.  Specifically:

* A clear value creation plan for any acquisition – even the small ones.  How does this fit in the strategy?  What are the metrics that will get impacted?  What should we expect from this acquisition, by when?

* A clear picture of the (actual) ownership structure of the acquired company

* A sound valuation logic – including an NPV analysis (not just a multiplier based valuation) and cash flow projections for the business pre and post valuation

* A commentary on the funding mechanism and how the buyer traded off the use of cash vs equity

* An identified integration manager (ala Bharti) and his/her role in the new acquired entity

* Mandatory reporting of performance against the projected (post acquisition) numbers

* A report on the value created by the acquisition – plan vs actual – included in the annual directors report for a few years after the acquisition

Now put yourself in the shoes of the person trying to justify the Satyam-Maytas deal!

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2 Responses to Acquisition governance

  1. The problem is not just with acquisitions. For any significant event or strategy there isn’t enough disclosure because regulations don’t require it. Also because the business press or businesss blogs that do in drpth analysis or investigative reporting are absent.

  2. amtgrg says:

    Yes – and isn’t that tragic. Unfortunately, much of the business press appears to be content with “planted” (and paid for) stories. There is a governance issue around our press too…

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