Just another deal By Abdel Azis Dimapunong Founding Chairman, Amanah Islamic Bank Chancellor, Islamic Banking Institute Just another deal. That is how I feel when a proposal comes my way for investments opportunities. It’s no big deal. It is very easy to have it inked. Just sign for a one page contract or a lengthy Memorandum of Agreement. Have this contract notarized and maybe authenticated by an appropriate government agency. Then that is already a deal. On this point, there is lesson in “The Secrets of Great Due Diligence”. According to this Harvard Business School Working Knowledge, “Sealing a deal is the easy part. But first comes due diligence.” In a Harvard Business Review excerpt by Geoffrey Cullinan, Jean-Marc Le Roux, and Rolf-Magnus Weddigen, an article concludes that “Deal making is glamorous; due diligence is not”. That paper is entitled: “When to walk away from a deal”. The authors know what they are talking about. Geoffrey Cullinan directs Bain & Company's European private equity practice from London. Jean-Marc Le Roux, in Paris, and Rolf-Magnus Weddigen, in Munich. I take it to mean that a deal is glamorous because it has the element of excitement and serendipity. This is particularly true when dealing with the rich and famous. There is excitement when dealing with the celebrities and royalties of wealth management such those in oil, gold, diamonds and precious stones. Deals in the fields of real estate, hotels, bio-energy and those in the information technology are also among the glamorous. But when it comes to due diligence, the excitements in Serendip could turn just dashing hopes in Brigadoon. All those glamorous deals and precious stones could turn just feathers in the wind. There are reasons why subjects of due diligence could wake up in that Scottish town of Brigadoon instead of James Hilton’s Shangri-La: These are: (1) The performance of due diligence may be an overkill or (2) intrusive, or (3) plain unreasonable, or (4) simply done over an extended period of time, or (5) when confusion arises as when due diligence seems to be redirected from the capital market to somewhere else. But worst is when (6) there is not much talking anymore at all. The guy you are talking to for a deal is already out of reach and you are instead surrounded by legal advisorsand consultants instead of the investors Any combinations of these reasons could trigger a decision to leave a deal. As to being intrusive, this is true mostly to Asian companies, particularly Japanese and Filipino corporations. According to the International Financial Law Center, “companies in Japan have always disliked the intrusive and burdensome due diligence investigations …” Due diligence is the stage in the process of a proposed buy out or acquisition where professional and highly paid advisers check the business out. They examine voluminous financial records in minute detail, checking the validity of almost every known fact about the business. The professionals may require reconstruction of financial statements. That includes historical performance and may extend down memory lane on Foundation Day. And they do not exempt credentials of directors and officers. Not only do auditors check bank accounts. They also check your wallet because the audit involves cash count. In many ways the process seems highly intrusive. It involves looking at voluminous documents within your business. It seems to repeat a lot of the work carried out previously by independent external auditors. As it is an extensive assessment, it can be very time-consuming. It can also seem to be a diversion from the real task of taking the company to the capital market. And as it is carried out by highly-paid professionals, it appears to be very expensive, accounting for a significant part of the cost of coming to the market. But due diligence is in many ways a central part of the process of securing finance or investment in the company. It is through this process that corporate advisers validate the business and its past track record, the credentials of its existing owners, managers and directors. A challenge to a due diligence should be taken as an invitation to the capital market. For a newly established or a developing company on a stage of putting up the capital, it should take as many inquiries and even investigations as there are expressions of interest by worthy investors. The more information is given, and the more reputable investors come to know about it, the stronger the corporate image builds up. It is true that due diligence is an essential part of a business deal for it provides the comfort for investors. But due diligence has a tendency to become a lengthy process. The time required analyzing a target of investment or acquisition could be unrealistic. The cost of professional fees for auditors and lawyers and other advisers could be a pot of money. “Potential sellers of businesses often abandon deals because the due diligence process has been slow and intrusive”. This is the view of the Financial Law Center. And if the burdensome due diligence is not managed properly, a song of Bob Dylan may apply. Bob Dylan sings: “Don’t think twice Its alright; when your rooster crows at the break of dawn, look at your window and I’ll be gone”. That is not to say that we step on the hydro back brake to halt whatever due diligence may have gone far. Islamic banks always have different views. While the Western World thinks of nanoseconds, you will always hear in the Muslim World, INSHA-ALLAH and SABR . The former means IF GOD PERMITS, the latter means PATIENCE (wherever that might lead to). Abdel Dimapunong is Project Director of ERA INVESTMENTS HK Ltd.., an investment company that provides venture capital and loan guarantees.