Due diligence? What's that? ask Asia-based business executives

PUBLISHED : Thursday, 05 August, 2010, 12:00am
UPDATED : Thursday, 05 August, 2010, 12:00am

A quarter of Asian-based company executives did not carry out due diligence on takeover targets before closing the deal, a survey of cross-border acquisitions over the past three years reveals.

The survey, compiled by consultancy firms Mercer and Kroll, shows that 26 per cent of the 155 respondents had never conducted due diligence - an investigation of a business or a person before a party signs a contract - or had considered doing so. And 9 per cent said they did not know what investigative due diligence was.

Forty-seven per cent of respondents that had found incidents of fraud in their target company indicated that they had uncovered them only after the transactions had been closed and as a result they had to renegotiate or exit the deals.

Respondents from Singapore, Hong Kong and Australia are more likely to have tried to obtain information on the management's background, company reputation, track record, regulatory compliance, market conditions, hidden interests, environmental liabilities and facts that had not been previously disclosed before agreeing on a takeover.

Respondents were selected at random from a list of recorded merger and acquisition transactions worth more than US$5 million from March 29, 2007 to March 29, 2010 compiled by mergermarket, the data provider.

Despite the Greater China region being viewed as a hub for merger and acquisitions over the next 18 months, it is among the riskiest areas for a takeover, owing to bribery concerns.

Respondents to the survey said they believed that corruption is most prominent in Eastern Europe and Russia, followed by Greater China and Africa.

However, only 1 per cent of them had checked if a target company had violated the United States Foreign Corrupt Practices Act (FCPA), which concerns securities law and bribery of foreign officials or similar laws posted by other regulators.

The consultants warned that the US Department of Justice and the US Securities and Exchange Commission, the American securities regulator, had been aggressively clamping down on FCPA violations globally.

Trusting to luck

Due diligence misses its target in Asia

Of the 155 business people surveyed, the proportion that had never done due diligence was: 26%