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Tuesday, November 19, 2013

Just like investors, companies too need to be careful about their acquisitions and investments. Paying too much of an asset could turn out to be a disaster in the long run. And it does not help create shareholder value either. Rather a bad, overpriced acquisition can actually destroy shareholder wealth instead. However, despite all the due diligence that companies conduct, they can still end up over paying for an acquisition. When this happens, the company's management has two choices. The first is the easier one to continue holding the assets as it is on the balance sheets and keep justifying the same.

The second and tougher one is to admit their mistake and write down the assets. This would entail a onetime pain but it is a sign of a more prudent and conscious management. This seems to be the case with the Tata Group companies. As reported by The Mint, the group's Chairman is writing down nearly US$ 15.5 bn of assets. These write downs are related to the acquisitions made by the group companies over the last decade. The move could be inferred as a prudent and ethical corporate practice of the management admitting their mistakes.

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