Le Magazine du Trésorier - n°62 - 2ème trimestre 2008 - (Page 9)
DOSSIER MANAGING MARKET RISKS WITH ACQUISITIONS IN EMERGING COUNTRIES TYPES OF ISSUES ENCOUNTERED Acquisitions in emerging countries are never easy for numerous reasons. For example, the acquirer has to overcome local legal issues which sometimes could be extremely complex given the absence of written rules and procedures, compared to Western Europe. Moreover, the group acquirer could also face political issues. It often must satisfy irrational constraints that it is not always used to. Having said that, we would like to underline another type of difficulty and risks it could encounter in investing in such countries with highly volatile currencies, high interest rates and inflation in parallel to over-performing growth. These issues very often oblige investors to organize their funding in a stronger currency to lower charges of interest. However, it also confronts them to foreign exchange risks. These are the types of problems the acquirer will have to solve. By using different leverages and mixing products, it will be in position to optimize return on assets purchased. The financial issues are pre- and post-acquisition. PRE-ACQUISITION FINANCIAL RISKS Prior to the acquisition, after having signed a long form agreement, a shareholder agreement or any sort of committing documents, the company will be exposed to the purchase currency until the payment flows are processed. It could last a couple of months, depending on conditions or due diligences to be performed. Some companies hedge the FOREX exposure even before they have been committed. They then use a series of options which are combined to finance purchased ones. This can be extremely expensive and is never guaranteed to be recovered. Some companies then consider that these costs are directly linked to the acquisition project, which is at risk. It could be viewed as costs related to the project, keeping in mind the risk of losing all (expenses as well as hedging costs). Some other groups prefer waiting for the signature of a committing document prior to any hedging strategy. POST -ACQUISITION FINANCIAL RISKS q Consolidation treatment issue One of the first issues is to define the consolidation treatment to be applied to the Joint Venture (JV). The accounting method adopted could impact the group financial statements. In some cases, with a minority participation or “at equity” consolidation treatment, the accounting impact is nil, although financially they remain exposed. In other cases, the consolidation will be proportional or full (if at least it can demonstrate a “de facto” control). Very often, treasurers think in terms of accounting volatility before deciding the adequate hedging / funding solution to be adopted. For the inter-company (partial) funding, there is also the issue of the accounting qualification of the loan. Is the group funding an interest bearing repayable loan or a non repayable one (at least within the next 5 years)? In other words, could we benefit from IAS 21 favorable treatment and “freeze” Acquisition Structure EU Acquirer Local Company (Holding) J-V Investments s Eq p pm t Assset / Equipment Assetss / Equipment Local co-shareholder(s) Emerging country Le Magazine du Trésorier - N° 62
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Le Magazine du Trésorier - n°62 - 2ème trimestre 2008