Don't ride Re power for overseas M&As: KPMG
As the US dollar struggles against other leading world currencies, M&A commentators at KPMG warn acquisitive companies to beware the ‘siren call’ of the faltering greenback.
By Bhanu Pande, TNN |
MUMBAI: As the US dollar struggles against other leading world currencies, M&A commentators at KPMG warn acquisitive companies to beware the ���siren call��� of the faltering greenback. They fear that the undeniable allure of a cheaper route into one of the world���s major consumer markets could cause some companies to disregard the basic rules of M&A transactions.
Buying into a deal which is attractive mainly because of a currency weakness could turn an acquirer into nothing more than a foreign exchange trader, looking for financial arbitrage and betting on a long-term rebound of the dollar. Irrespective of market conditions, one shouldn���t ignore the tried and trusted rules of business, says Gopal Ramanathan, a partner with KPMG Advisory Practice and global head of Transaction Services.
���Ensuring a strategic fit between acquirer and target ought to be the prime consideration,��� he adds. ���If you somehow realise an added benefit as a result of currency fluctuations, that���s an icing on the cake, but icing without the cake can make you sick.���
Buying into a deal which is attractive mainly because of a currency weakness could turn an acquirer into nothing more than a foreign exchange trader, looking for financial arbitrage and betting on a long-term rebound of the dollar. Irrespective of market conditions, one shouldn���t ignore the tried and trusted rules of business, says Gopal Ramanathan, a partner with KPMG Advisory Practice and global head of Transaction Services.
���Ensuring a strategic fit between acquirer and target ought to be the prime consideration,��� he adds. ���If you somehow realise an added benefit as a result of currency fluctuations, that���s an icing on the cake, but icing without the cake can make you sick.���
After the US dollar hit an all-time low against the euro in late March, Mr Ramanathan pointed out that any returns made on an investment into the US will also be earned in the same ���weak��� US dollar. Therefore, companies making a ���currency play��� need to be in it for the long-term upswing in the currency value, and this is the realm of the foreign exchange trader, not an acquisitive business looking to grow based upon a sound acquisition strategy.
According to Russell Parera, CEO, KPMG India, there���s some talk in M&A circles that the current credit crunch in the west and the general slowing down of the US economy provides a unique opportunity for Indian companies to acquire US businesses on the cheap.
���However in evaluating such opportunities, Indian companies should perform adequate sensitivities in their valuation models to assess the impact of a fluctuating rupee and the unlikely scenario as we see it today of a strengthening US dollar.
This analysis will paint a more realistic picture in the long term.��� To further reinforce the point, there���s also a technical accounting argument against such an investment strategy. Under nearly all internationally-recognised accounting principles (including US GAAP and IFRS), while the returns on M&A investments would be subject to currency fluctuations (up or down), any currency movements on the initial investment would be reflected in a component of equity and not over the income statement.
KPMG says Indian companies need to be cautious. They should also stick to the fundamental drivers of an acquisition and not get carried away by the strengthening rupee against the US dollar.
According to Russell Parera, CEO, KPMG India, there���s some talk in M&A circles that the current credit crunch in the west and the general slowing down of the US economy provides a unique opportunity for Indian companies to acquire US businesses on the cheap.
���However in evaluating such opportunities, Indian companies should perform adequate sensitivities in their valuation models to assess the impact of a fluctuating rupee and the unlikely scenario as we see it today of a strengthening US dollar.
This analysis will paint a more realistic picture in the long term.��� To further reinforce the point, there���s also a technical accounting argument against such an investment strategy. Under nearly all internationally-recognised accounting principles (including US GAAP and IFRS), while the returns on M&A investments would be subject to currency fluctuations (up or down), any currency movements on the initial investment would be reflected in a component of equity and not over the income statement.
KPMG says Indian companies need to be cautious. They should also stick to the fundamental drivers of an acquisition and not get carried away by the strengthening rupee against the US dollar.
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