MNC open offers and their impact |
June, 2001 |
Today one opens the papers and is flooded with news about buybacks, at attractive offer prices especially by MNC’s. Why does a MNC make an open offer to acquire all the shares of the domestic shareholders, what are the aims behind it, how does it impact the company and its future? Several MNCs have come out with offers to buy out the entire stake of domestic shareholders in their local affiliates. What started as a trickle has now gathered momentum and, like a river in spate, now looks all set to wash away precious holdings in these companies through a combination of carrot and stick. The carrot lies in the offer of a price that is at a considerable premium to the current market price. The stick, of course, is the threat that the shares would be delisted from Indian bourses once the public holding goes below the threshold limit of 10 per cent. Delisting of a healthy profit making company is a new concept for the Indian investors.
But why delisting? How has this come about? The question can be answered from more than one perspective. At one level, it is an inevitable consequence of the government's liberalised policy on foreign direct investment. From the sacred 40 per cent ceiling on foreign ownership which, at one time, saw the likes of IBM and Coca-Cola getting the boot, today, with the possible exception of atomic energy equipment or fighter planes, practically anything can be manufactured in the country with 100 per cent foreign ownership. If 100 per cent foreign equity is allowed in practically all sectors for a fresh applicant seeking permission to enter the Indian market, it would be difficult for the authorities to eny existing units permission to reconvert into such true blue foreign companies, uncontaminated by the presence of domestic stakeholders.
If LG or Samsung can be allowed to set up 100 per cent foreign-owned airconditioner businesses in the country, it would be unfair of the Government to deny Carrier Aircon the privilege of 100 per cent foreign ownership. So, principles of equity and fairness from a policy perspective demand that this be conceded.
From the perspective of a company wanting to enhance foreign stake, too, the desire to consolidate ownership structure under a single stock market or as near to it as local country regulations would allow, seems entirely logical. There are economies of scale in raising resources for funding business needs. The global market for capital is increasingly institutionalised with mutual funds, pension funds and private equity funds increasingly acquiring a large corpus of investible funds. This, in turn, has led to companies resorting to private placement of capital. For prospective investors too, the effort of undertaking a due diligence exercise as a prelude to actual investment is the same. In fact, it is not only capital mobilisation by companies that is getting consolidated around a single stock market, stock exchanges are themselves undergoing a process of consolidation. The day is perhaps not far when the world would be covered under one or few stock exchanges as an inevitable consequence of globalisation of the financial services industry.
Managements of overseas corporations with listed Indian enterprises have an added incentive for acquiring 100 per cent control over the local arm. Such acquisitions could potentially enhance the market capitalisation and PE of the consolidated entity, overseas. Take Otis Elevators, now going through a buyout of minority shareholder stake in India. Its profits are currently capitalised at a P/E multiple of around 16. But United Technologies, which owns majority stake in Otis Elevators, is currently quoting at a P/E of 21. It makes eminent good sense for the management of United Technologies to seek out to buy out the minority stake in Otis Elevators. In other words, the management of United Technologies is attempting to capitalise on the arbitrage opportunities that exist in P/E ratios across stock exchanges where the company's shares happen to be listed.
This new concept is a little hard on the Indian investors, starved as they are of quality paper. Aside from the blue-chip IT stocks and a handful of manufacturing companies, only MNCs in the FMCG, pharma, engineering and chemicals sectors hold promise of wealth appreciation for investors. Not surprising, considering that these companies can hold their own against global competition. And global competitiveness is the only touchstone of earnings sustainability in these difficult times. Ofcourse the ultimate solution is for domestic investors to have the opportunity to pick up a stake in the overseas entity seeking to buy out their stake. But that would mean liberalising the regime on foreign exchange transactions on capital account which is still some time away. So till then the Indian investors will be flooded with buybacks carrots and the delisting stick.
Aru Srivastava
Feedback Rate this article