Archive for the ‘Due Diligence’ Category

Service of Too Big to Question

Monday, October 12th, 2015

 

Due diligence

In the news last week were at least two examples of people who should have known better. They conducted zero due diligence on activities of an individual or about a company for which they were about to pay dearly either because of the stellar background of the former or the size of the deal in the latter instance–or maybe because they were gullible [unlikely] or lazy. In all cases people were not doing their jobs.

Anupreeta Das and Jean Eaglesham’s Wall Street Journal story, “Harvard, Goldman, VC…Fugitive,” is about Iftikar Ahmed, known as “Ifty” to his friends. [Shifty is more appropriate.] They report that he “allegedly stole $65 million” from his partners at Oak Investment Partners. He “exploited the trust-based culture of the venture capital firm,” they wrote. According to the reporters, “Mr. Ahmed’s former colleagues at Norwalk, Conn.-based Oak found that he used doctored deal documents, phony exchange rates and fake invoices to siphon off millions of dollars into secret bank accounts, according to prosecutors and regulators. Oak made the discoveries only after Mr. Ahmed was arrested on insider-trading charges unrelated to his work at the firm.” Nobody knows where Ifty is these days–India they think.

The article describes the fascinating details and is worth a read. What got me was a trustsideline detail. Ifty’s wife was able to buy a Manhattan apartment for $8.5 million cash weeks after he was arrested! The intrusive financial raking that small fries must go through to buy a co-op is insulting, so clearly, this purchase must have taken place at a condo whose board members wear blinders. They aren’t the only board so equipped. Please read on.

Next, I was glued to The New York Times article, “A Deal That Still Haunts Hewlett-Packard” which you should also read. The allegations illustrate inconceivable neglect by a CEO and board of a publicly owned company. To describe their vetting process as “scrutiny light” is an exaggeration in the $11 billion purchase of a British company called Autonomy, covered by reporter James B. Stewart. Most people would do more research before purchasing a vacuum cleaner than HP’s chairman Léo Apotheker and the HP board did before buying a foreign software company.

wearing blindersAccording to Stewart, “Some consider the Autonomy acquisition to be the worst corporate deal ever. Just how bad is confirmed by the latest revelations from a shareholders’ suit over the deal: Mr. Apotheker didn’t even read the due diligence report on Autonomy that H.P. commissioned from KPMG, the giant accounting firm. Nor did Raymond J. Lane, the board chairman, or any other member of the board, according to a report prepared by the law firm Proskauer Rose, which was hired to represent H.P.’s independent directors.”

Stewart notes that the executive summary contained “numerous warnings.” But they didn’t read the executive summary either. [Stewart did–as well as the full report.] He wrote: “The executive summary stresses repeatedly that Autonomy stonewalled KPMG accountants, who were granted ‘access to very limited proprietary financial and tax information.'” The summary questioned the “claimed stellar revenue growth” and Autonomy’s “revenue recognition practices,” crucial backup information to justify such an expensive acquisition. 

In the first instance, does a “trust-based culture” have a place in today’s world? Were the Oak venture capital partners asleep at the switch, busy doing similar fiddles or simply blindsided?

Regarding the second example, I Googled “most expensive vacuum cleaners,” and saw one that cost $5,599.99. Would you pay that much based on a brochure claim that it was worth the money with no other information? Stewart wrote, “I’d say that for $11 billion, HP should have been able to see whatever it wanted.” Do you agree?

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