“Of one thing be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.”
– Warren Buffett
Making a projection to impress the CEO is so easy that a 23 year old MBA can do it. What the CEO believes is important – after that excel, powerpoint, flash…take over and make it believable. Unless the company has a strong Chairman of the Board along with a couple of outside directors capable of protecting the shareholders interest, the whole exercise of board approval is a joke. I clearly remember one south based finance company entering many businesses (looked like a perfect integration) – but is now trying to sell of all the ‘new’ businesses.
Similarly one very large group which made (and continues to make) its money from the commodity businesses is now in telecom, retail, financial services, hotels, software, etc. It has hired some of the worst people in terms of reputation (surely the promoter should know more than me?). The reputation risk that this group runs is worrisome – over the last 52 years my Dad has benefitted by investing in the commodity business of this group. Is it time we started using other surnames to denote richness? Is there no adviser who will tell the emperor that he is naked? Well I can only pare my holdings…and remember it takes a kid to tell the king that he is naked.
And such acquisitons, or chasing the moon kind of crazy moves is done not just by the big groups, but now by small companies also. Thanks to the Venture Capital funds, many hair brained ideas are getting funded, and some of them may even see the IPO and public listing.
You need to remember that out of the 9000 odd Indian companies listed in India not more than 200 have made money CONSISTENTLY for the small shareholder. Remember that while investing. Stay away from IPOs which have a ROCE of 8%. Your ppf should do better than that.
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