Recently, some of the country?s top finance and corporate honchos were addressing a seminar session on mergers and acquisitions, when one of them, a top professional from one of the country?s largest business groups, raised a very important point: The importance of ego in making or breaking a deal. Mergers and acquisitions have become part and parcel of Indian corporate life, with the takeover code providing the rules of the acquisitions game. But how often is the real reason for ? and the mechanics of ? a particular acquisition or sale known to shareholders of a company? The answer is: Hardly ever.
Talk to any investment banker who has worked with the country?s largest and best-known corporations or business groups, and he will tell you how difficult it often is to get two sides to even talk, let alone sign on the dotted line. And this, even when both sides know that a deal may be the best thing for their companies and groups. Equally, ego also often plays a part in the pricing of a deal, and therefore in actually making it happen, or breaking it.
I was once told a story about how, despite the fact that the head of a business group had decided to go for a particular acquisition, he took almost a month to decide on making that all-important telephone call to the selling side ? thinking, re-thinking and thinking all over again whether he should make that call. After all, decades of painstaking effort at building a group?s profile and image was involved. Would that pride be compromised if he called and actually said he wanted to strike a deal? Shouldn?t the seller make the first call? And even when the industrialist did decide to make that phone call, he was not sure how he would actually begin the conversation. Should he come to the point? Should he mention the deal at all? Or just make it a courtesy call? On this began another round of consultations with investment bankers ? or so the story goes. Equally difficult was getting the meeting organised!
Pride and ego also play a very important part in deals while letting go of a company. A corporate group may have built up a stake in a company painstakingly over a period of time, when the company and its lines of business made sense for the acquiring group. Over the years, circumstances and business environments change, and the group may eventually come to realise that the investment made over the years no longer makes sense for it and it?s better to cash out. At that point, a decision will typically have to be taken whether to cash out or continue to hold on to that investment.
Much as any industrialist would tell you that business and emotion should never be mixed, in reality, it?s often the case that the industrialist would, because of sheer pride, want to hold on to that investment fearing that a sale may send wrong signals to the market and to the corporate world. ?Make sure we look good in the deal,? is something the selling side would often say to the investment banker in such a situation.
And what would make the seller ?look good?? Naturally, a sale at a healthy premium to the ruling market price. Similar is the case even while bidding for prized disinvestment candidates. Only the very astute can keep ego and pride aside and decide that sometimes, it?s better to lose than to land up with a company which one has bid excessively for.
While it is difficult for ordinary shareholders to know the exact goings-on behind the scenes when deals take place, most finance professionals will concede that shareholders often end up paying the price for the promoter group?s ego hassles and pride. Acquisitions may take longer to happen, disinvestments may be pushed back, eventually leading to erosion in shareholder value. In such cases, the role of institutional investors becomes of paramount importance. By the sheer weight of their holdings, they have the power to ask questions at board meetings and even seek details of pricing and valuations. How many institutions do that seriously is anybody?s guess.