Money in a Human Economy by Hart Keith

Author:Hart, Keith
Language: eng
Format: epub
Publisher: Berghahn Books
Published: 2017-12-14T16:00:00+00:00

Financial Transactions as Power Relations

The purchase of companies occurs within particular temporalities and regular forms of interaction. The process is usually marked by important moments when parties sign contracts and agree on the next step, before the actual exchange of money for property rights. This exchange calibrates tension between the parties, since all employees agree that they have a common interest in realizing the transaction and share official mistrust, since each side may want to manipulate or hide things. According to all interviewees, in M&A operations less than half of those officially started come to a conclusion. In private equity and venture capital, less than one in ten prospected companies end up being bought. The balance of power can favor either side and change sides during the transaction. The purchaser may bring money that the seller company is looking for, but the latter may have assets that are hard to find elsewhere. Usually, the purchaser wants as much information as possible about the target company before the transaction is concluded, but this may only be negotiated at the latter’s own rhythm. It may demand proof of engagement by the purchaser, for instance by agreeing on a “target price,” before disclosing information that could be used for other purposes, especially if the transaction breaks down. Confidentiality clauses, exclusivity periods, target prices, and the rights and duties of each party are specified in contracts that constitute important landmarks in a process lasting between three months and more than a year.

The employees I met stressed that transactions are always marked by negotiations concerning at least two interrelated topics: the legal rights and duties of each party during and after the transaction and the price. SMEs are usually located in one place and can develop close connections to local political and legal authorities, in particular if the managers are members of the Communist Party. The relationship can be even closer if the SME is a subsidiary of a larger state-owned company. Interviewees stressed that, if the purchase of an SME distances its previous managers from the company, the latter may actually not only lose its commercial connections, but may have to face renegotiation of licenses and even property rights of the land on which it stands. These potential tensions are intertwined with discussions about how to calculate the price of the SME. The interviewees’ professional norm is based on standardized methods taught in business schools and the finance departments of universities in the United States, Europe, China, and many other places. These methods are multiple and do not lead to similar results. They can define the “market value” of a company’s assets, considered as the sum of the sale price of its assets or as the cost of replicating the company, for instance by buying the land, machinery, patents, etc. They may consider the “relative value” of the company, comparing it to similar companies that have either just been sold or are listed in stock exchanges and who therefore have a “market price” for their shares.

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