No price sensitive information was concealed, says Polaris
By It may be recalled, in what was tout | 03 Oct 2000
The shareholders of Rs 160 crore-revenue Polaris Software Lab Ltd, Chennai, and the investing community at large, are still in the dark as to why the company backed out of acquiring the New Jersey-based $9 million-revenue Data Inc.
After their initial bonhomie the two Arun's – Mr. Arun Jain, chairman and managing director, Polaris and Mr. Arun Verma, president, Data Inc - are at loggerheads now. The reason? Data Inc's suit, in a US court, against Polaris for not completing the acquisition agreement. The war of words between the promoters of the two companies is of no help to the shareholders of Polaris, who wish to find out the real reason for the deal to be cancelled.
But on the other hand, it throws up lot of crucial questions, which remains unanswered.
The first and foremost is, did Polaris sit on price sensitive information - calling off the Data Inc, USA, acquisition - for nearly two weeks without announcing to its shareholders? It seems so, if one goes by the sequence of events and Mr. Jain's statement on the imbroglio.
The $ 21 million MoU
It may be recalled, in what was touted as the largest cross border acquisition, Polaris and Data Inc. entered into a memorandum of understanding (MoU) on 23 May 2000 for a strategic acquisition of the latter by the former for $ 21 million. The acquisition was originally coordinated by UBS Warburg and was subject to due diligence by KPMG. On hearing the news, the stock markets reacted positively.
But on 26 September, Data Inc surprised the world by announcing that it had filed a suit against Polaris for going back on the acquisition MoU. In the wake of a series of media reports about the suit, Polaris, on 30 September, made its formal announcement about cancelling the MoU with Data Inc.
In a hurriedly convened press conference – which seemed to conclude as soon as it began - Mr. Jain read out a statement about Polaris' stand on the issue. He said, "in the second week of September, 2000, we communicated (to Data Inc) that we were not interested in pursuing the deal and that we were calling off the proposed acquisition. And Data Inc agreed. We also agreed, in principle, that we would announce the calling off of the acquisition formally when Mr. Arun Verma visited India next." Interestingly the statement is silent on the timing of Mr. Verma's visit.
When asked why the company waited till 30 September when the decision on a price sensitive matter was taken as early as second week of September, Mr. Raghuraman Balakrishnan, asst. vice president, corporate communication remarked, "No. We didn't withhold any price sensitive information." According to him, Polaris was hoping that the deal would sail through.
Why was the deal cancelled?
In May, when the MoU was signed between Polaris and Data Inc, Mr. Jain remarked, "this acquisition further strengthens our focus on providing software solutions to the banking, financial services and insurance segments."
He had also gone on record saying, "this acquisition would help leverage the existing development centre of Data Inc. and help accelerate setting up of the global development centre for Polaris, thus falling in line with the objective of the Initial Public Offering (IPO) of the company. This acquisition will play a crucial role in increasing the client base with in-roads to Fortune 500 companies."
Despite the obvious advantages, in a matter of three months Mr. Jain decided to do a 360-degree turn. But why did he do so, is the $ 21 million question!
The only reason given by Polaris for cancelling the MoU is that the company's audit committee, post due diligence, recommended that the acquisition in its proposed form would not be in the interest of Polaris' shareholders.
However Mr. Balakrishnan refused to elaborate, on the specious ground of contravening SEBI guidelines and the confidentiality clause in the agreements signed by Polaris with KPMG - the due diligence auditors - and Data Inc.
If one were to believe Mr. Verma, Polaris adopted various tactics to get out of the MoU. According to him, Polaris sought to drastically reduce its down payment of $ 15 million under the MoU, for reasons that has no relevance to Data Inc's business capability.
Mr Verma alleges, "we revealed extensive confidential information to Polaris during this period, which now could seriously compromise our competitive position if
the deal is not consummated."
According to him Polaris even requested for an audited financial statement for the first 6 months of this year, citing this technicality to be the reason that was causing delay in taking over Data Inc.
"Although not obligated to do so, this financial statement was prepared and made available to Polaris," Mr. Verma said. However Mr. Balakrishnan said that Polaris got the report only couple of days back.
If that been the case, why did Polaris decide to cancel the deal during the second week of September without looking into Data Inc's six-monthly audit report? Why did Polaris ask Data Inc for a price revision? And finally, did KPMG come across anything adverse about Data Inc while doing the due diligence that would impact severely Polaris?
As is his wont Mr. Balakrishnan refused to answer the above set of questions. According to Mr. Verma, Mr. Jain's reasoning for not going forward to close the deal was that the accounting for the cash down payment, on Polaris (as required by generally accepted accounting practices - GAAP) might reflect poorly on Polaris' financial statement and possibly affect future third party investment in Polaris.
"It is difficult to believe that a company of Polaris' stature was not aware of the implications of GAAP and the accounting issues involved in paying out $ 15 million down payment, which it undertook to pay within12 weeks."
Not wanting to respond directly to Mr. Verma and also refuting any notion that Polaris lacked cash resources, Mr. Balakrishnan remarked, "our present cash holding is Rs 45 crore and we are comfortable with that." He also stated that the company is embarking on an Rs 55 crore-expansion programme. When queried about the damages that the company might have to pay if the case filed by Data Inc in US court goes against Polaris Balakrishnan said, "as per the MoU the maximum legal damages that a party can claim is $1 lakh and it won't be a problem for Polaris, if at all the case goes against us."
After their initial bonhomie the two Arun's – Mr. Arun Jain, chairman and managing director, Polaris and Mr. Arun Verma, president, Data Inc - are at loggerheads now. The reason? Data Inc's suit, in a US court, against Polaris for not completing the acquisition agreement. The war of words between the promoters of the two companies is of no help to the shareholders of Polaris, who wish to find out the real reason for the deal to be cancelled.
But on the other hand, it throws up lot of crucial questions, which remains unanswered.
The first and foremost is, did Polaris sit on price sensitive information - calling off the Data Inc, USA, acquisition - for nearly two weeks without announcing to its shareholders? It seems so, if one goes by the sequence of events and Mr. Jain's statement on the imbroglio.
The $ 21 million MoU
It may be recalled, in what was touted as the largest cross border acquisition, Polaris and Data Inc. entered into a memorandum of understanding (MoU) on 23 May 2000 for a strategic acquisition of the latter by the former for $ 21 million. The acquisition was originally coordinated by UBS Warburg and was subject to due diligence by KPMG. On hearing the news, the stock markets reacted positively.
But on 26 September, Data Inc surprised the world by announcing that it had filed a suit against Polaris for going back on the acquisition MoU. In the wake of a series of media reports about the suit, Polaris, on 30 September, made its formal announcement about cancelling the MoU with Data Inc.
In a hurriedly convened press conference – which seemed to conclude as soon as it began - Mr. Jain read out a statement about Polaris' stand on the issue. He said, "in the second week of September, 2000, we communicated (to Data Inc) that we were not interested in pursuing the deal and that we were calling off the proposed acquisition. And Data Inc agreed. We also agreed, in principle, that we would announce the calling off of the acquisition formally when Mr. Arun Verma visited India next." Interestingly the statement is silent on the timing of Mr. Verma's visit.
When asked why the company waited till 30 September when the decision on a price sensitive matter was taken as early as second week of September, Mr. Raghuraman Balakrishnan, asst. vice president, corporate communication remarked, "No. We didn't withhold any price sensitive information." According to him, Polaris was hoping that the deal would sail through.
Why was the deal cancelled?
In May, when the MoU was signed between Polaris and Data Inc, Mr. Jain remarked, "this acquisition further strengthens our focus on providing software solutions to the banking, financial services and insurance segments."
He had also gone on record saying, "this acquisition would help leverage the existing development centre of Data Inc. and help accelerate setting up of the global development centre for Polaris, thus falling in line with the objective of the Initial Public Offering (IPO) of the company. This acquisition will play a crucial role in increasing the client base with in-roads to Fortune 500 companies."
Despite the obvious advantages, in a matter of three months Mr. Jain decided to do a 360-degree turn. But why did he do so, is the $ 21 million question!
The only reason given by Polaris for cancelling the MoU is that the company's audit committee, post due diligence, recommended that the acquisition in its proposed form would not be in the interest of Polaris' shareholders.
However Mr. Balakrishnan refused to elaborate, on the specious ground of contravening SEBI guidelines and the confidentiality clause in the agreements signed by Polaris with KPMG - the due diligence auditors - and Data Inc.
If one were to believe Mr. Verma, Polaris adopted various tactics to get out of the MoU. According to him, Polaris sought to drastically reduce its down payment of $ 15 million under the MoU, for reasons that has no relevance to Data Inc's business capability.
Mr Verma alleges, "we revealed extensive confidential information to Polaris during this period, which now could seriously compromise our competitive position if
the deal is not consummated."
According to him Polaris even requested for an audited financial statement for the first 6 months of this year, citing this technicality to be the reason that was causing delay in taking over Data Inc.
"Although not obligated to do so, this financial statement was prepared and made available to Polaris," Mr. Verma said. However Mr. Balakrishnan said that Polaris got the report only couple of days back.
If that been the case, why did Polaris decide to cancel the deal during the second week of September without looking into Data Inc's six-monthly audit report? Why did Polaris ask Data Inc for a price revision? And finally, did KPMG come across anything adverse about Data Inc while doing the due diligence that would impact severely Polaris?
As is his wont Mr. Balakrishnan refused to answer the above set of questions. According to Mr. Verma, Mr. Jain's reasoning for not going forward to close the deal was that the accounting for the cash down payment, on Polaris (as required by generally accepted accounting practices - GAAP) might reflect poorly on Polaris' financial statement and possibly affect future third party investment in Polaris.
"It is difficult to believe that a company of Polaris' stature was not aware of the implications of GAAP and the accounting issues involved in paying out $ 15 million down payment, which it undertook to pay within12 weeks."
Not wanting to respond directly to Mr. Verma and also refuting any notion that Polaris lacked cash resources, Mr. Balakrishnan remarked, "our present cash holding is Rs 45 crore and we are comfortable with that." He also stated that the company is embarking on an Rs 55 crore-expansion programme. When queried about the damages that the company might have to pay if the case filed by Data Inc in US court goes against Polaris Balakrishnan said, "as per the MoU the maximum legal damages that a party can claim is $1 lakh and it won't be a problem for Polaris, if at all the case goes against us."
Watch this space!