The more that is revealed, the less clear things become. So it is for most business fights that descend into he-said-she-said. Add China as the backdrop and utter confusion reigns. ERA Mining Machinery’s former chairman Emory Williams said yesterday he was shocked, dismayed and surprised that Caterpillar found misconduct serious enough for it to write off two-thirds of what it paid just seven months ago.
This is a funny one. Somehow Caterpillar’s due diligence team, following a “rigorous and robust” process, did not notice accounting misconduct worth $580m. They had six months between the deal being announced and closing. All the wider world – and Mr Williams, he says – knows is that the multiyear cover-up involved revenue recognition and inventory. Still, diligence does not come much simpler than counting mine shaft supports and checking sales receipts. And these issues are hardly a surprise in China, especially when they eventually come to light through a routine stock check.
Caterpillar overpaid for ERA, so a writedown should have appeared at some point. ERA was sold for more than 50 times 2010 profits – the last full year there were any – or 3.5 times 2011 sales. Such a price, when the buyer liked to emphasise its target’s rapid growth, leaves no room for, say, a slowdown in China. Take Sany Heavy, ERA’s bigger rival in mining equipment. Between the ERA deal closing in June and Caterpillar’s December year-end book closing, shares in Sany lost a quarter of their value as the industry slowed.