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CEO's Ruminations: Pre-IPO Due Diligence


I apologize profusely to those of you who tinkled regarding my failure to ruminate, at least publicly, over the last few months. Suffice it to say, life and all its odd permutations have had me hopping.

Hey, let’s hear it for The Donald and Rocket Man!!! I definitely have my issues with both of these fellas and their new “bromance”, but I am giddy as a teenage gal dressing for her first “date” that leaders of two countries with nuclear weapons are breaking bread rather than uttering threats and/or lobbing bombs. Baby steps are better than “ad hominem” attacks (ya gotta love those polite Canadiens), man-made craters or loss of life in my book. Watch this space…we just might be saying “thanks” to two unlikely heroes.

Back to business. Did you happen to see the Mark Cuban produced, Netflix flick aptly entitled The China Hustle? Basically a story of robber baron Yanks mining the less than transparent corporate world of China for the purpose of flogging shares on USA stock exchanges/markets. These sort of developments always require two greedy parties, i.e. the investors and the promoters/companies. The China Hustle adds some usually missed third parties to the mix, i.e. regulators and financial functionaries (lawyers, accountants, banks).

Bottom line: a plethora of Chinese companies are now being de-listed, sued for fraud and generally being shown to have participated in a multi-billion USD scam.

I raise this story because the largest failure was in the pre-IPO (pre initial public offering) due diligence process. Basically, if a big law firm or one of the final four accounting firms said “OK”, then the shares of the companies were listed/quoted and investors bought with the confidence of gold at the end of the rainbow.

This is where I-OnAsia makes a difference. We work with the big law firms, final four accounting firms, promoters, etc, to ensure full disclosure and the offering memorandum is accurate.

Whether it is Hong Kong, Singapore or any of the stock exchanges/markets in the USA, we roll up our sleeves and have a look under the hood, so to speak!

“All that glisters is not gold…” – The Merchant of Venice, Act II, Scene VII, William Shakespeare

The Bard, yet again, was years before his time in speaking truth.

Pre-IPO due diligence, basically, covers any activity the objective of which is to achieve transparency and to ensure what is promoted to the investing public via the offering memorandum or other mediums is accurate.

Large-scale IPOs require lawyers, accountants, specialists (surveyors, engineers, etc), regulators and even private investigation firms to sift through an enormous amout of information provided by the company.

I am confident you will not be surprised to learn the company believes it is perfect. This is the moment the Bard’s warning rings true.

Nothing is perfect!!!

Equally, I can tell you the amount of information, useful or otherwise, provided and often not provided (but discovered) is mind boggling. Given the numerous methods by which communication is plastered all over our faces on a daily basis, it is true to say “We are drowning in information but starved for knowledge.” (John Naisbitt)

Why hire I-OnAsia to handle such an important element of an initial public offering?

First and with my usual diplomatic approach to all matters, we do not rip-off and OVER-charge our clients. We have noticed how some of our so-called competitors dress-up similar services simply to charge exorbitant fees. I am a big fan of earning a fair wage for our services. However, if the waiter adds a zero to an excellent meal, then I take umbrage.

Second, we specialize in the search for knowledge in a cost and time-effective manner. Such services include, but by the very nature of the beast are not limited to and continually are being enhanced, the following:

§ Organization and Good Standing. Does the company acutally exist and is authorised to do business? Did the company pay its annual government fees?

§ Previous Financing Efforts. What sort of private offerings, debt arrangements, preferred securities, etc., pre-date the IPO?

§ Financial Information. Has the accountant been paid off? Did the auditor really check the numbers with what is happening on the ground?

§ Physical Assets. Is the inventory fairly valued? Does it even exist? Does the machinery actually work?

§ Real Estate. Is the factory really situated on 100 acres?

§ Intellectual Property. Trademarks? Patents? Knowhow? What is owned and by whom? Is it adequately protected?

§ Employees and Employee Benefits. Credentials? Are they legally allowed to work for the company in that country? Are they compensated fairly? Are their benefits excessive?

§ Licenses and Permits. Simply put, is the company authorised by the relevant government agency(ies) to do its business?

§ Environmental Issues. Is the factory situated on a toxic waste site?

§ Taxes. Is the company current? Any tax liens?

§ Material Contracts. Loans? Stock options? Non-disclosure? Non-competition?

§ Product or Service Lines. Existing? Under development?

§ Customer Information. Major? Marketing and advertising? Competitors?

§ Litigation. Contingent liabilities, material commitments, government action or any of those now fairly common sexual harrassment claims? Criminal matters?

§ Anti-bribery and foreign corruption. Does the company have policies to meet these legal requirements?

§ Insurance Coverage. Do they have health and/or life insurance for employees? Do they have D&O liability insurance? Are machines and other equipment covered? Is coverage sufficient?

§ Professionals. Were they simply hired as a “label” or did they actually do their jobs?

§ Articles and Publicity. Positive or negative image? Is the company or its executives/employees active in social media?

Doing extensive homework takes time, effort and focus on the ultimate goal of ensuring transparency and accuracy.

Third and as I always point out in virtually every Rumination, the very nature of our team is to be skeptical. We adhere to Arthur Conan Doyle’s truism that “There is nothing as deceptive as an obvious fact.” Simply stated, when working for a client, we take the position that all obvious facts are nothing but well-dressed deceptions seeking a colonosocopy-like investigation.

Finally, we have the global network to ensure the correct subject matter experts are employed to handle the job.

Are you going public? Are you a professional seeking some additional and necessary pre-IPO investigative assistance?

Tinkle me…

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About Us

 

I-OnAsia is a global risk management consultancy.  Our company has a twenty-year track record of success.  We are Asia's market leader in critical areas of Due Diligence, Crisis Management, Security ServicesCorporate Investigations, and Litigation SupportOur teams in New York and London have a superior understanding of Asia, and also solve local problems. Experience matters.  I-OnAsia has completed more than 17,000 cases.  Clients benefit from our hard-earned insights and global reach.  

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