The Hindu Business Line : Winners' curse and accountants' nightmare

The botched acquisition of Air Sahara by Jet Airways has brought one of the Big 4 accounting firms under public glare. Reports in the media have it that the firm has offered to give back its valuation fees. This is as sad a commentary on the lack of tools in accountants' kit for valuing businesses as it is on the naïveté of businessmen on the prowl.

The saga of mergers and acquisitions (M&A) is replete with instances of winners' curse — paying a mind-boggling amount for a business in sheer over-enthusiasm only to rue the decision sooner than later. Yet, businessmen allow themselves to be swept off their feet driven by the overweening desire for dominant market share.

There are of course honourable exceptions. Mr Vijay Mallya — who is known for his flamboyance — displayed remarkable level-headedness and prescience in keeping his hands off when Air Sahara was scouting for suitors and, in fact, went on record criticising Jet Airways for offering a price that Air Sahara did not deserve.

The business of M&As is as complicated and involved as the share market, and both defy rational valuations. Nobody can come up with the logic for a Rs 10 share quoting at Rs 45,000, apart from the time-tested demand-supply theory.

In a frenzied market, fundamentals are overshadowed and overwhelmed by sentiments and hearsay.

But the accountant is not as much in the doghouse for a misadventure in the share market as he is when an M&A deal goes sour. This is because players on the bourses do not set as much store by the accountant's averments as by the prospects of the company whose shares they set out to buy.

A takeover tycoon, however, sets considerable store by the accountant's report on the value of business he seeks to acquire. One can, therefore, understand if he is miffed by the overvaluation of the business and the resultant overpayment. The accountant often trips and flounders on the rocks of brand valuation which, despite innocent protestations to the contrary, remains subjective and whimsical to this day — often driven by hype and hoopla.

But in l'affaire Air Sahara, the charge against the accountant is more fundamental — of being oblivious of, and unable to ferret out, liabilities not reflected in the balance-sheet. The accountant's job in this regard is unenviable — he has to go through each transaction with a fine-tooth comb.

While a M&A is a private affair between the buyer and the seller, the valuation of shares for the primary market is very much a public affair. It would help if the Securities and Exchange Board of India (SEBI) were to ordain independent valuation by more than one accountant in order to bring about sobriety in the primary market, where merchant bankers have allowed themselves to be manipulated by company managements in the matter of valuation of shares that are yet to be traded.

While the accountants will have to answer the takeover tycoon who has resources at his command to pin them down, investors in the primary market are an amorphous and scattered lot, often with no one to take up the cudgels on their behalf.

(The author is a Delhi-based chartered accountant.)

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