Business Trophy-Hunting Can Go Wrong Anywhere

By Philip Bowring - International Herald Tribune

HONG KONG - The prices being paid and the debts being incurred in the current wave of takeovers in the West are a cause of bewilderment in Asia. Deutsche Telekom's dollars 50 billion bid for the unprofitable U.S. wireless phone company Voicestream is the most spectacular recent example. But deals big and small of questionable logic have become almost daily events.

Leading the charge have been once sleepy European state-controlled giants, including France Telecom. Drawing on sheer size and ready access to debt to fund their aggressive moves, they have set out to prove they can become major global players - whatever the price. With all the zeal of late converts, European companies big and small have been buying into a U.S. stock market bloated by debt-driven expansion of corporate earnings and share purchases.

Why should Asians in particular be puzzled by this folly? For the last three years, they have been lectured by Western investment bankers. They have been told that heavy borrowing to finance expansion for expansion's sake was Asia's road to ruin. They have been urged to emphasize return on equity, to avoid running after market share or putting diversification before profit. Failure to concentrate on ''shareholder value'' was, they have been told, a major contributor to the Asian crisis.

Indeed it was. But what is happening now in the West looks rather like what happened in Asia. The catchphrase, now as then, is: ''We can't afford not to be there.''

There also are similarities to the Japanese ventures in the United States in the late 1980s. Armed with fistfuls of dollars provided by the U.S. trade deficit and with easy credit from banks back home, Japanese buyers paid fancy prices for trophy properties ranging from Hollywood studios to Rockefeller Center. Those U.S. investments went on to contribute to Japan's corporate woes.

Now the big-game hunters are more likely European and the trophies are phone companies and other high-flying enterprises with tech labels and Nasdaq listings. The purchases are being made in the name of globalization. Supposedly the new wired, or wireless, economy is not to be a paradise for small and quick-witted companies but one in which only global giants will survive.

Maybe. But more likely these high-priced takeovers are ego trips for chief executives who want to figure on a news magazine list of captains of the new economy.

Deutsche Telekom is no Daewoo, but there is no doubt about the rush to debt on both sides of the Atlantic. Corporate debt in the United States has been rising ata double-digit rate.

Leading the field in increasing leverage as a way of raising equity reward (and risk) has been that largest and most admired of old economy corporations, General Electric. Acquisitions from abroad financed by bond issues and bank loans now are addingto the pyramid. Debt is pushing stock prices to levels that are extremely high by historical standards, including those in pre-crisis Asia. Can these trophy buys generate the cash to service the debt, let alone increase return on equity?

Equity-financed takeovers carry relatively little risk. But valuations that ignore reasonable earnings expectations have stunned Asian observers. The same masters of business administration from Wall Street's leading firms who lectured Asians about shareholder value are encouraging today's market binge.

To get the picture, compare Thailand with the Nasdaq darlings. The capitalization of the whole Bangkok stock market, once the world's hottest, is now about dollars 35 billion. A clutch of little-known Nasdaq companies with minimal revenues, let alone earnings, are valued at more than that. The Nasdaq-listed high-tech optics company JDS Uniphase is valued at over dollars 100 billion.

It is a reminder of the crazy days in Japan in 1989 when the Imperial Palace Gardens in Tokyo were supposedly worth more than all of California.

Asia's recovery from crisis may not be complete. But it is now in a position to remind a West bloated with easy money and puffed up by techno-arrogance of what happens when greed turns to fear, hubris to humiliation and debt to default.

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