The Hands of The Palm Oil Competitors

So why should the management of one company acquire another, especially at a price in excess of the implicit 'buyout price'? Presumably, the answer must be that the money spent on the acquisition can earn a higher return than it can by being invested in the buyer's own business. It might well be argued that in these circumstances the buyer should simply return the money involved to shareholders, ideally accompanied by an alternative investment recommendation. Then the company might theoretically have provided his shareholders with certainty of return on their current investment, while at the same time thoughtfully indicating the next appropriate use for the funds returned. Without the real and demonstrable existence of strategic benefits, the buyer may simply be denying shareholders the right to use their own money in the most effective and profitable way.

Does it help to draw a distinction between acquisitions made for commercially strategic reasons and those justified on purely financial grounds? Shareholders in the buyer will themselves have invested for purely financial reasons. So for the distinction to mean anything it has to mean that there will indeed be financial benefits but that they will take some time to emerge. Of course, the need to claim the existence of strategic, synergistic benefits is greatly heightened when public, contested takeovers are involved. On these occasions the need for synergy may seem more like a need for alchemy, if not actual wizardry, as the takeover battle proceeds and the bid premium soars. Thus one becomes accustomed to the spectacle of the contested takeover bid involving a dizzy premium, and evident dilution of the buyer's earnings, but being accompanied by a reassuring comment describing the 'strategic benefits resulting from operating and product synergies, which can only be fully realized over a medium to longer time frame...'

Perhaps sufficient strategic benefits cannot be found. In that case the buyout will prevail. But the circle is then squared since, in time, the company will be sold once more, either in the context of a public flotation or more commonly, to a corporate buyer. This is the way the buyout investor achieves his 'exit' and thus his return. The logical industry buyer, who apparently failed to identify sufficient synergies the first time round, will be invited to try again. But this time the price will have risen over three years, by say, w40 per cent at least if the target buyout return is to be achieved. See in this way, the role of the buyout is to provide a short to medium-term intermediation between corporate buyers and sellers and while there is nothing wrong in principle with that, it is evidently different from the rather more extravagant claims sometimes made.

It is in people's nature to be secretive about things which affect their interests. Instinctively and logically, a corporate manager will behave in the same way. He will seek to ensure that competitively sensitive information does not get into the hands of this competitors. Yet in the system operated by the Anglo-Saxons, management also has to cope with the problem of Stock Exchange disclosure requirements. And the more detailed the information revealed, the more useful it is in laying bare the company's achievements and future plans, and the more approving the financial establishment, especially of course the financial press.

The obvious contradiction between reveling all and maintaining a competitive edge by concealment seems to be lost: it is simply part of the system which keeps the acquisition business so vigorous in the UK and US. And although it may seem bizarre, there is the slightly smug assumption that the rest of the world has still to come of age in this area of corporate governance and indeed that, as 1992 arrives, there will be lucrative opportunities to help other Europeans acquire these sophisticated ways. Never mind that these same countries have staidly overtaken and gone ahead of the UK and US in the little matter of designing, making and selling things.
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