Frankly Speaking: The blame bubble

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Why the due diligence?Conducting due diligence on a company that is a takeover target can be dangerous. The exercise in most instances favours the acquirer over the company that is being acquired.

What’s even more perplexing is if due diligence is done prior to the company’s take­over via the acquisition of assets and liabilities. As it is, the takeover of a company via the acquisition of assets and liabilities is frowned upon. And the proposition is somewhat worse if the potential acquirer is allowed to do due diligence.

That exactly is the predicament of KNM Group. Bluefire Capital Group Ltd, which is controlled by major shareholder Lee Swee Eng, has proposed to purchase all the assets and liabilities of the company at 90 sen per share. The partners of Bluefire are several private equity funds.

The proposal has a caveat — the  acquirer, or primarily the financiers, must complete a satisfactory due diligence and show a firm financing commitment to undertake the proposal. The board of KNM has given Bluefire until March 22 to complete the due diligence.

The proposal with the condition of due diligence attached is unusual.

Firstly, why must the board allow due diligence by a company that wants to buy the assets and liabilities? If the acquirer really thinks KNM is undervalued, it should just make the offer based on what’s available publicly.

Unless, of course, the acquirer does not think the published and audited accounts are good enough. If the company is making available certain information to those conducting the due diligence, shouldn’t it be made available to all shareholders?

Secondly, what happens if the acquirer is not happy with the due diligence results? It will walk away and the biggest loser will be the existing shareholders of KNM, Lee included. Lee is the single largest shareholder in KNM and has the most to lose. So, why allow the due diligence?

Thirdly, Lee himself is the managing director of the company. Shouldn’t he have all the relevant information that the financiers would need to embark on the deal? Considering that he is part of Bluefire, why is there is a need for due diligence?

In the past, there have been cases where the acquirer walked away after an unsatisfactory due diligence. The end result was that it was bad for the company. The most recent case was that of Ramunia Holdings Bhd, when MISC International Bhd walked away from a proposed takeover after a lengthy due diligence exercise.

Fortunately, Ramunia found another buyer for its assets in Sime Darby, but not on the same terms. Not all companies will get as lucky  as Ramunia. Some may not find another buyer for a long, long time.

Ekuinas’ transparency promise on watchEkuiti Nasional Bhd’s (Ekuinas) promise to adopt a “full disclosure policy” on its investments will soon be put to the test. By the end of the month, the government-linked private equity fund, set up to promote equitable and sustainable bumiputera economic participation, will be announcing its first investment.

Besides the highly politicised issue of bumiputera participation, the announcement will also be watched given the amount of money budgeted to be ploughed into companies — a total of RM3.5 billion. Each investment will be for a minimum 20% stake and worth at least RM30 million.

Sceptics, of course, will keep watch to see if the kitty is being used to assist well-aligned friends. Often, just a thin line separates business from politics. If clear lines on investment policies and valuations are not drawn, Ekuinas can easily be seen as a means to bail out ailing bumiputera companies and a vehicle accumulating assets whose values are questionable.This is precisely why transparency is a must and not a luxury.

Knowing this, Ekuinas kicked off by declaring that it “is a commercially driven organisation with the primary objective of delivering financial value on its investments”. Ekuinas went on to say that it is “committed to pursuing its goals in a market-friendly, transparent manner”, to ensure sustainable results.

Apart from data on the utilisation, investment focus and performance of its fund, Ekuinas also promised to disclose a summary of its investee companies on its website or annual report. These include data like company name, sector, financial information and unrealised gross returns on that investment to date. A proper explanation will be given if there is need for information to be withheld, managing director Datuk Abdul Rahman Ahmad said.

As far as words go, Ekuinas certainly sounds committed. But the real test will be in its actions. The latter always speak louder.

Dengue dangerYear in and year out, we hear of deaths from dengue and dengue haemorrhagic fever. Between Feb 7 and 13, Health Minister Datuk Seri Liow Tiong Lai said, there were 1,059 cases nationwide resulting in nine deaths. Three of the deceased were children aged from five months to four years.

Without going into details, the minister said that the number of hot spots had increased from 38 to 40 and that 58% of the hot spots experienced an epidemic.

Although dengue fever is cyclical in nature, nine deaths a week is a serious toll. If the trend continues, we could see more than 450 deaths a year, which means that dengue fever should be given immediate attention by the government. But then again, dengue fever is not something we are unfamiliar with. It has been endemic in Malaysia and other regions of Southeast Asia since the 1950s.

It is worrying that a disease like dengue can test our healthcare system and shows that we must pay more attention to social medicine. When influenza A (H1N1) was first detected in Malaysia in mid-May 2009, in the span of a mere three months, we had 51 deaths from 2,955 cases. It is a matter of concern that the mortality rate in Malaysia was much higher than in the neighbouring countries.

While we strive to attain world-beating feats, sailing around the world and planting our national car on the North or South Pole, let’s not forget the basics, such as the provision of good public healthcare.

This article appeared in Corporate page of The Edge Malaysia, Issue 794, Feb 22-28, 2010.