The Hindu Business Line : Overseas acquisitions — Needed, information better and faster

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Overseas acquisitions — Needed, information better and faster

S. Vaidya Nathan

THE Securities and Exchange Board of India must quickly tone up the disclosures made by Indian companies when they acquire businesses abroad. The acquisition of FLAG Telecom of the US by Reliance and that of Carl Dan Peddinghaus GmbH of Germany by Bharat Forge are the most recent cases in point.

The Aditya Birla and Sterlite groups recently picked up mining interests abroad. Companies in the IT sector such as Wipro and HCL Technologies have also acquired business units outside India.

As Indian companies reach out for business opportunities abroad, more such acquisitions can be expected. Information disclosure must enable investors to get a clear idea of the pay-offs that come with such deals, which are material events.

For reasons of confidentiality and regulatory clearances in the overseas market, it may not be possible for companies to make elaborate disclosures immediately. For instance, Bharat Forge has not revealed the price tag for the acquisition of the forging unit in Germany. That this deal would catapult it to the status of the second largest forgings manufacturer in the world, and an idea of revenues of the acquired unit for 2002, are the only critical information available as of now.

However, if material information is withheld for too long in such deals, it could create scope for informed trading and place one set of investors at an advantage over the others. Over at least a six-month period (that can later be reduced) from the date of acquisition, SEBI should require companies to provide the following information, among others, on cross-border deals:

The cost of acquisition, with a clear break-up of the type of assets — such as manufacturing units, receivables, inventory — - as well as the debt burden.

The acquired company's financial profile over a three-to-five-year period so that shareholders of the buying firm can get a clear picture of the former's growth over a fairly long period. Information on operating profit margins would be of particular significance, as cost-structures could be vastly different from those of the Indian entity.

If the deal involves acquisition of more than a 51 per cent stake in the overseas company, a consolidated picture of the key numbers for at least the last couple of years would enhance clarity about the earnings implications.

The mode of financing of the acquisition is an area where a high degree of transparency is necessary. For instance, in the acquisitions pursued by Tata Tea (of Tetley) and Bharat Forge, a special purpose vehicle was used. How the SPV would be bankrolled and how the benefits of the acquired company need to be clearly outlined.

The plans for the overseas unit such as its re-location, merger, asset stripping to make it leaner and meaner, reduction in labour strength; the time-frame for executing such plans; the growth prospects as seen by the acquiring company; exchange rate implications; issues that could be the key to integration and the extent to it would be EPS (earnings per share) accretive, are information that needs to be placed in the public domain.

The detailed disclosure document that was put out when the Daimler Chrysler deal was inked in the mid-1990s could, among others, serve as a good reference point to mandate disclosure requirements.

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