Hedging Bets, Seizing Opportunities

Sept. 21, 1998

These days, some 15 months after Asias financial crisis began with the July 1997 collapse of Thailands currency, firms from around the world have disassembled a few more production lines and shuttered a few more sales offices in Asia than originally anticipated.

But mostly multinationals are cautious, more aware than they were only a couple of years ago of the downside risks when investing in plants, establishing R&D facilities, or setting up branch offices.

Companies are hedging their bets by more carefully controlling their foreign-exchange exposure. "They will lock in an exchange rate . . . to take out the uncertainty of fluctuations," relates Arthur Carpentier, a senior manager with Arthur Andersen in Houston. Typically, hedges are for 30, 60, 90, or 180 days, or for the time that will likely be needed to close a specific deal.

Some U.S. firms, such as GE, are taking advantage of devalued currencies in Asia and snapping up companies at bargain-basement prices. But there are huge risks involved -- cultural and political as well as economic -- cautions Larraine Segil, a former aerospace executive whos cofounder and partner in the Lared Group, a Los Angeles-based firm specializing in strategic alliances. "Who knows what they are going to do with their currencies?" she asks. "And once youre in and youre a player . . . youre no longer making a nice, inexpensive acquisition, youre [having] to operate in it."

However, even as the financial crisis continues in Asia, corporate-finance and accounting types are turning -- or should be turning -- their attention to Europe and to a currency thats soon to be. On Jan. 1, a single currency unimaginatively dubbed the euro will debut in 11 of the European Unions (EU) 15 member nations. The focus of many firms will continue to be on treasury and cash-management issues, including establishing euro-compatible bank relationships, says Ronald K. Chung, special projects consultant at the Treasury Management Assn., Bethesda, Md.

Yet the euros introduction, which will extend until the year 2002, could affect what goods companies produce, where they manufacture them, and how theyre priced.

"One of the consequences you can expect is increased price transparency," says Michiel Van Der Lof, a senior manager at Ernst & Young LLP, New York. Example: With all price lists in euros and product price differences readily apparent, an executive in an Italian company might be heard to say, "Well, I dont care where you get it from -- either Paris or Germany -- but I want the lower price," relates Van Der Lof.

"The companies that are thinking about . . . the strategic implications of the euro are going to be the companies that can leverage this to competitive advantage," says John J. Klee, a partner in PwCs operational risk services group in Cleveland. In contrast, he suggests, the firms that arent tackling such strategic issues as "markets served and products offered" probably will be disadvantaged because with a common currency price differences will be readily apparent.

"You just cant continue thinking that the German is going to buy from the German, and the Frenchman from the Frenchman," Klee says. And with some forecasts suggesting that the euros implementation will reduce prices in Europe by as much as 30%, the executives in a U.S.-based multinational heavily reliant on its European operations for revenue and earnings literally cant afford to be passive, he stresses.

IBM Corp. is one U.S.-based multinational that hasnt been waiting for the euro to happen -- although Paris-based Peter Cruttenden, director of process management for IBM Europe, Middle East and Africa, doesnt anticipate the euro having the major product, manufacturing location, and price impact that some other executives expect.

For instance, there will not be a great impact on IBM when prices are in euros, because the company already operates in a "relatively sophisticated, highly dynamic, highly competitive marketplace. And we have always had a policy of trying to keep our prices as closely harmonized as we possibly can."

Nevertheless, because the euros introduction is more than "just a minor side issue of interest to the corporate treasurer" and "is a change that affects every nook and cranny of the organization," for two years IBM has been pursuing a six-project program to prepare itself for the currencys debut, Cruttenden states.

In addition to modifying its own finance, accounting, treasury, and procurement processes to make them euro-friendly and trying to keep its nearly 100,000 employees in Europe informed, IBM has been doing such things as assessing its market opportunities, figuring out how to deliver data-modification tools to customers, and deciding where to place the euro symbol on computer keyboards -- its on the lower right quarter of the E key, except for keyboards destined for Ireland and the UK, where its on the 4 key. Preparing for the euro "is an extremely big deal for us," Cruttenden summarizes.

Eventually there could be a similar big deal in Asia. Despite the regions current financial turmoil and Japans severe recession, an Asian euro could make its debut sometime during the first two decades of the 21st century.

"Where does Asias response to the euro come from?" muses Daniel Orchant, a partner at KPMG Peat Marwick LLP, New York.

"Japan is still viewed as a leader in the region, and Japan will probably lead whatever response there is," he suggests. Japan and China together would create "one huge, deep capital market," notes PwCs Klee. So an Asian euro "is probably not unheard of" -- although Klee is unsure whether its appearance is "years, decades, even a century away."

Narrowing The GAAP?

Presumably sooner than an Asian euros debut, perhaps within two years, corporations could see the introduction of a new set of internationally comparable accounting standards. These rules would, at least in theory, bring greater consistency to quarterly financial statements and annual reports from companies all around the globe and allow investors to make more informed decisions.

Globalization, as illustrated by last weeks expected merger between Chrysler Corp. and Daimler-Benz AG into DaimlerChrysler, is forcing firms to think about the advantages of a single set of accounting standards, believes PwCs Schulman. "If we can start to get accounting rules and policies that are similar around the world, the cost of maintaining independent groups goes way down," he says. "And thats a huge reason why you want to do this."

U.S. generally accepted accounting principles (GAAP) are probably the most stringent in the world today. And while theyre expected to figure extensively in the standards now being developed by the London-based International Accounting Standards Committee (IASC), new international rules could yield some unwelcome surprises.

Indeed, significant differences exist between U.S. GAAP and current IASC accounting rules. For example, international standards explicitly permit several things prohibited under U.S. GAAP, including revaluation of assets, reversals of writedowns for impairment losses, and the capitalization of development costs. In contrast, U.S. standards specifically prohibit them, notes the Financial Accounting Standards Board (FASB), a Norwalk, Conn.-based group that, along with others, issues U.S. corporate accounting standards.

Current international rules also tend to be less detailed than U.S. standards, providing less guidance to auditors and preparers seeking to present consistent financial results for similar transactions, the FASB points out.

The U.S., Canada, and Japan do not subscribe to the existing international standards, and they and several other countries may or may not embrace the rules under development.

"Whats going on here, basically, is a lot of politics and nationalism -- and with good reason," explains Carrie Bloomer, manager of the IASC-U.S. comparability project at the FASB. "The rest of the world doesnt want U.S. GAAP forced down its throat. But, on the other hand, theyll acknowledge that they respect U.S. [capital] markets, and U.S. GAAP, and the quality of the standards," she says.

"A lot of the pressure" for international standards, Bloomer says, is coming from European companies that want to list in the U.S. but contend conforming to U.S. accounting standards is complex and costly.

Armonk, N.Y.-based Joseph J. Martin, IBMs assistant controller, detects a potential problem with the international rules now being developed. "Today, IBM can use its financial statements to raise money in most countries of the world, in most of the stock markets, and equity markets, and bond markets of the world. And they [IBMs statements] are taken at face value," he states.

However, sometime in the future, the folks in some local capital market could refuse to accept IBM statements written according to U.S. GAAP and demand they be reconciled to international generally accepted principles. "That would cause additional work for us -- and for no real reason than to have access to [that] market," Martin says. "You have the potential for a turnaround from what happens today. If non-U.S. companies want access to the U.S. [capital] markets, they have got to do a reconciliation to U.S. GAAP."

Martin also is among those executives who feel that the IASC is moving way too fast. "They are trying to get things done in a time frame without due diligence, without adequate comment," he says. Example: the IASC is trying to deal with such complex financial instruments as derivatives in seven months in contrast to seven years that the FASB took. "Somewhere in there, by the way, is the right answer," quips Martin.

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