The Hindu Business Line : CAMEL in a cage

The acronym CAMEL (company, assets, management, earnings and liquidity) is an excellent prod to a financial analyst’s memory, serving as it does to picturesquely remind him of the five central aspects of the company he seeks to analyse.

Foreign target

This universal and all-weather prescription for an analyst transcends borders and, therefore, applies to cross border acquisitions (CBA) as well. But when he trains his guns on a foreign target, in addition to riding the camel, he has to be cagey too, if one may say so. Culture, administration, geography and economics are the additional watchwords succinctly, though less picturesquely, squeezed into the acronym CAGE for the one itching to lay his hands on a foreign company.

A lot has already been written about the cultural aspects of CBA more in the context of overseas mergers and acquisitions (M&A) that have come unstuck. Some of them may be exaggerated or at best highlight the negative stereotypes of the country and its people the target company belongs to. But the central message emanating from all of them is that if you don’t act local, your goose is cooked even if you think global.

Thus one has to respect the Japanese sense of fierce loyalty to the organisation he belongs to and respect the German concern for the workmen and his punctiliousness if one wants to do business in these countries successfully. Lakshmi Mittal won alien respect and overcame their resistance by thoughtfully and sensibly agreeing to the continuation of the incumbent native CEO of Arcelor — the company he had taken over — instead of installing impulsively his son in the coveted post.

Administration subsumes government policies and restrictions unique to foreigners. Governments range from xenophobic to the most hospitable that roll out the red carpet to the foreign investors. India, for example, has rolled out red carpet to FIIs even as it pursues an opaque FDI policy. In South America where socialism is on a comeback trail, one has to be wary of the possible restrictive government policies on investments and repatriation.

Geography is a big imponderable in a CBA. While one cannot change the geography or his neighbour, one can decide not to target a company located in hostile environs. Thus a company located in Israel and having its manufacturing facilities there should be a strict no-no given the fact that it is surrounded by inimical Arab neighbours constantly sniping at it. Acquisition of Indonesian companies may also be avoided not because the nation is war-torn but because it is ravaged by earthquakes from time to time.

Economic factors

The economic factors of course are too well known to bear repetition. Access to newer markets, economics of scale, synergy, vertical integration, access to technology, etc., are factors that are not unique to CBA but nevertheless important. Winners’ curse, which often comes to haunt the one who has taken over a company by scoring a pyrrhic victory over his rivals in the race, may dog a CBA even more because of the immense potential for greater over-estimation of the true worth of a distant but tantalising target.

The analysis and scrutiny of a foreign target then is of a CAMEL inside a CAGE. A camel because of its unwieldy body defies a cage but unless examined against the background of its CAGE, the CAMEL ride may prove to be incomplete skirting as it does the central issues unique to a foreign country.

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

More Stories on : Accountancy | Mergers & Acquisitions

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Indo-Nigerian ties: Strategic for energy security

Funding infrastructure

CAMEL in a cage

Inclusive growth runs into an oil slick

Microcredit is effective for women in self-employment

Market storms that lash the energy engine

Banks and farmers