Just another deal

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					                                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

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.

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