Indian companies are well-known for treating due diligence as a mere fad and going in for mergers and acquisitions, sometimes even on the basis of personal relationships between promoters. It seems even global marquee names, which often lecture their emerging market peers about the merits of proper due diligence, suffer from the same disease. Take, for example, the Diageo-Vijay Mallya deal. In 2012, global liquor giant Diageo persuaded the former mercurial chairman of USL to sell United Spirits after nearly four years of on-again, off-again courtship, but the dust is yet to settle over alleged funds diversion charges. Last week, USL, now led by Diageo said that additional inquiries have established a fresh Rs 1,225-crore money trail to beneficiaries controlled by Mr Mallya — a charge dismissed by the latter.
If the fresh allegations by Diageo are generating cynicism in many quarters, the reason is simple: this is not the first time that the liquor giant is making funds diversion charges against its erstwhile chairman. It had earlier complained to the markets regulator about funds being diverted between 2010 and 2013 from USL and/or its subsidiaries to certain UB group firms. Diageo’s complaint was based on a forensic probe by PricewaterhouseCoopers (PwC). What raised eyebrows was that even as investigations into Mr Mallya's financial dealings were on, Diageo entered into a “sweetheart” Rs 515-crore exit deal with him. That’s not all: in 2014, a Karnataka high court order questioned Diageo extending loan guarantees to offshore company Watson (to finance F1) when Mr Mallya was already facing allegations of fund diversions to tax havens. Watson is one of the six beneficiaries named in the disclosures.
The question that arises from these examples is whether Diageo is being fair in playing the victim card. Many of the proxy advisory firms may not be off the mark in saying that the company turned a blind eye to a lot of misgivings and concerns about Mr Mallya’s conduct in its eagerness to get a grip on the world’s largest liquor market in terms of units sold. A related question is the shoddy due diligence that Diageo’s merchant bankers did and the less-than-painstaking efforts of USL’s auditors to figure out more on the alleged fund diversion. To be fair to Diageo, it acquired USL only after the merchant bankers and consultants said they had done a thorough job of sifting through the accounts and other documents of the company. Some of the issues with USL accounts were already mentioned in the accounts — it is inconceivable why nobody delved deep into them.
The most charitable question Diageo now faces is whether it was taken in by the charms of the flamboyant Mr Mallya. No one knows that, but the same question was asked when Daiichi was under fire for its sloppy due diligence procedures before taking over Ranbaxy. Leading M&A consultants say acquirers sometimes ignore the obvious red flags when they fall in love with a potential deal. It is easy with the excitement of the moment to downplay stumbling blocks or not to make the extra effort on additional research. Did history repeat itself?
