<!–GA_googleFillSlot(“Business_Story_toptext”);–>

NOW that independent advisors (IAs) are being required to conduct extensive valuations of companies subjected to takeovers, one major concern is that higher fees will have to be paid to these advisors.

But listed companies should not gripe about this. It will be money well spent. After all, hiring an IA is a very important part of a company’s duty and responsibility to its shareholders.

The company has gone public, taken money from investors and now faces a buyout offer. It’s only expected that the company should strive as much as possible to provide its non-interested shareholders with all the relevant facts and figures to guide these investors on how to decide on the buyout offer. And in doing so, ensure that thorough valuation methods are used.

It maybe that IA fees in takeovers may be even doubled with this new ruling. But so what?

How can the justification for spending on IA fees rank below say, a company paying for new spanking cars for its executives?

Incidentally, IA fees currently cost between RM250,000 to RM300,000, going by some accounts.

The cost of a new BMW 5 Series ranges from RM333,800 to RM598,800.

And this is not even considering all the monies listed companies spend on lavish annual dinners, overseas trips for its bosses and multiple salaries and allowances for directors.

The new rule by the Securities Commission (SC) should be seen as good news for all and arguably overdue. To recap, the SC has mandated that IAs need to put a value on the target company’s assets. With this new rule, gone will be the days when IAs could get away with merely providing PE (price earnings) multiple comparisons or other “armchair-type” valuations. They would now need to show that a fitting valuation method is carried out on the company and its assets, pulling in the assistance of professional valuers if necessary.

However, there is a school of thought that reckons that all this analysis by the IA is merely an academic exercise. Remember that in dishing out their advice, IAs will have to consider the twin factors of fairness and reasonableness.

It is in the determination of fairness that IAs are now mandated to conduct a full-blown valuation of the asset.

But despite deeming an offer unfair, an IA can still hold the view that the offer is reasonable (and therefore recommend acceptance of it) if there is an absence of a higher bid.

In short, even though the company is valued more, if there just isn’t anyone willing to pay that price for it, then the advisor may recommend shareholders take albeit unfair offer.

So then why go through all the extra effort and cost to do this full-blown valuation when at the end of the day, what’s important is whether there’s a counter bid for the asset or company?

But that argument is shallow. Due processes must be followed, especially when it involves helping shareholders make better informed decisions. Well done IA reports could also lead to better price discovery the valuation report on the company may open up the eyes of other investors who may start buying into the stock, causing the share price to appreciate and thereby deeming the buyout offer less attractive.

● Business news editor Risen Jayaseelan is looking forward to reading the IAs in takeover situations that are going to come out after Nov 1.