SCwatch


WHEN GODFATHER IS UNDER SIEGE – ‘SEEK COVER’ SOMEWHERE ELSE!!

When I read recently about the examiner’s report on events culminating in the demise of Lehman Brothers, it did not really surprise me to hear about the corporate and accounting sleight of hands to ‘cover up’ the true financial position of the organisation.

Cynically, it is like someone whose occupation is to advise clients how to fudge their books and who is now actually doing it himself in order to artificially justify his existence!

This is the concern about the role of consultants the world over. Do they actually provide value add propositions or are they just glorified goons who provide a way for their clients to justify taking certain self interested decisions ….. supported and justified by these so-called consultants?

It is a well known fact that since Boards of Directors are loath to make decisions on their own ….. they use high-flying consultants to justify the decisions of the directors.

And if these consultants are to be paid on the basis of getting approval for the deals, how can they not work towards it? 

Yes, there are independent advisers appointed for most of these deals …… but who appoints them? It’s the ‘self interested’ company directors themselves.

This reminds me of a local Malaysian deal involving an investment bank that took place a few years’ ago but is now being re-examined by the hind-sight analysts!

The local bank was apparently ‘encouraged strenuously’ to employ a particular individual as its CEO. However, he was already heading a boutique consultancy which he also owned.

So a deal was cut for the local bank to wholly acquire the boutique consultancy from him for a tidy sum after which he would join the local bank as its CEO!

Now the question is what is in it for the local bank to buy the boutique consultancy? Why was there a premium paid over and above its apparent net value? After all, the aim was to recruit the individual. 

To insinuate that the boutique consultancy had a valuable brand, a ‘fantastic’ track record and could provide keen competition to the local bank is at best ……. laughable!

Whilst trying to give as much of the benefit of the doubt to the deal, let us accept at face value that the final consideration for the boutique consultancy will be based on what is actually collected from the consultancy’s debtors, which was estimated at RM8.0 million.

The final audited sum was RM5.24 million.

However, the amount paid to the CONSULTANT was RM5.99 million. Why was he paid a premium of RM0.75 million?

Justifying the premium paid by saying that post acquisition profits of RM0.93 million was achieved by the boutique consultancy is mischievous as it had already been subsumed by the local bank.

It was riding on the name of the local bank ….. otherwise the local bank would have undertaken a name change into that of the boutique consultancy!!

Hello, the local bank was doing him a favour (as a result of the ‘strenuous encouragement’) to acquire the boutique consultancy at net earning value and yet had to sucker out an additional RM0.75 million!!

With these kind of kinky deals taking place, it may be an idea to appoint independent advisers whose fees are to be paid only on condition that they can justify AGAINST the terms of the deal being proposed to  the company. As a result, the KPI of the independent adviser is clear and will not be inhibited in any way.

In addition, the independent adviser might even be ‘encouraged’ to uncover skeletons in the cup-board of interested parties such that a steep DISCOUNT (rather than premium) be paid for many of today’s deals or have the deals scuppered altogether!

UPDATE: Yes, I have been reminded that the CEO has since decided to resign from the local bank to go for better things (or possibly cover)! What kind of deal is this?

The local bank bought the boutique consultancy to enable the owner to join the former as CEO. And when the buy-over is legally completed, the CEO resigns! This is preposterous!!

Legally and morally, the premium of RM0.75 million should be refunded to the local bank.

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