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Company Performance Evaluation across Stock Market Borders

8 September 2006 - Features - Editor

Transnational companies, though common targets of attack on social and environmental issues, are the darlings of every major stock market. Professionals everywhere dream of making global careers, and investors have learnt from decades of experience that these companies are repositories of management excellence.

Many international companies have distinct entities for each major stock market. There are countries such as India and the Middle East kingdoms where local equity participation has traditionally been a pre-requisite for doing business. There are other relatively isolated nations where international companies have preferred to enter in to joint ventures with local partners to deal optimally with local culture and conditions. Multi-nationals have also formed distinct entities of their own volition in major markets such as the United States, to deal with the major business opportunities presented.

Stock market investors need to look at corporate performance across national boundaries on a level basis. Most affiliate and subsidiary companies have complex business relationships with their peers in other countries and with the Group Company in the home stock market as well. Buy, sell and hold decisions should be taken with due weight for how a stock market member with dependant relationships takes decisions.

Transfer prices for both purchases as well as sales impact stock market values and prospects, with respect to international companies. The Group Company can put normal economics and negotiation aside, and fix prices at which subsidiaries in other countries buy products and sell services to intra-Group customers so as to take advantage of different country tax regimes.

Subsidiaries in relatively poor nations tend to have inherent cost disadvantages compared to small and domestic members of the stock market. This is because they are obliged to follow international standards which may not be the most efficient for local conditions. Remuneration structures for senior personnel, especially those on deputation from Group Headquarters, are typical examples of uneven cost burdens international players suffer in the milieu of an under-developed economy.

Dividends can suffer in emerging companies as international companies tend to prefer building reserves and heavy investments in branding and market shares. Local stock market investors have to keep away from minority ownership of subsidiaries of multi-national conglomerates, if they wish quick and gregarious returns.

It is useful to monitor all management statements across countries for such companies, rather than depend on local stock market requirements for disclosures and returns. All intra-Group transactions need review, though finding details in the maze of statutory reports can be a chore!

 


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