The ex-Ranbaxy brothers were fined ₹3,500 by an arbitration panel for having hidden facts from Daiichi while selling their company to the latter. A world away, in the famous Q&A session that Warren Buffett and his deputy Charlie Munger faced at the Berkshire Hathaway shareholders meet, they talked disparagingly about the 'due diligence' that companies conduct when acquiring a business. As I wrote last week, there was a question at the meet about this from Andrew Ross Sorkin, author of 'Too Big To Fail' and New York Times columns.,He asked about Berkshire's quickfire approach to acquisition deals. Mr. Buffett and Mr. Munger are well-known for moving rapidly and not doing much due diligence that is generally done when companies acquiring other companies. Is this the kind of mistake that Daiichi made when dealing with the Ranbaxy brothers? Apparently not.
In his answer to Sorkin, Buffett said that that they had made "plenty" of errors, but those involved the basic economics or the business and the sector. He said the mistakes were like a bad contract or a something like that, something that would have been discovered by more due diligence. Of the six or seven bad acquisitions that Berkshire has made, not a single one would have been prevented by longer or more rigorous due diligence. As Munger described it, the key factors in successful acquisitions were 'business qualities' and 'human qualities'. If one could judge these correctly, then the acquisition would be a success.
I guess that's where Daiichi went wrong. They would have conducted every bit of due diligence that would be required technically. However, the due diligence would have been stymied by the fact that on the other side of the deal, there were people who were apparently specifically acting to hide facts and fabricate non-facts. The very idea of 'due diligence' sounds a little suspect. It indicates not what all should ideally be done, but the minimum that is needed for the lawyers and the accountants to cover their backsides in the event that something goes wrong.
In reality, in an entrepreneurial-minded business which is committed to outcomes rather than just processes, there will be someone who will carry out an intense 'undue diligence' of judging human character and go a little light on the pro forma due diligence. If Daiichi had been run by someone of that mindset then quite possibly, it would never have gotten into the Ranbaxy mess.
While this sounds like it should be of concern only to those who are buying entire companies, it's actually something that every equity investor should look into. Granted, when you are buying a little bit of a stock in a company, you may not have access to the right inputs but nowadays there's often a lot on the internet that can give you a window on the kind of human being a company's promoter and management are. In fact, good professional investors like fund managers or others always seem aware of such factors and discuss them in private conversations. They will avoid investing in a company because the promoters are crooks but never put this down anywhere public as a reason, or discuss it publicly. However, the information stays fragmented and anecdotal.
Similarly, there are promoters that are at the other end of the spectrum but never get talked about. A much-respected business pioneer of an earlier era--Finolex's PP Chhabria passed away a few days ago. Most Indians--even those interested in business and investing--discovered the human qualities of the man on reading some of the obituaries. The general tendency is to believe that businessmen's negatives stay hidden while positives are all PR. That's vaguely true but PR is a thin veneer and one that comes off rather easily in these days of social media.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
