Tuesday, October 30, 2012

The cost of not calling Kroll

China Kanghui looks like a done deal:



It appears Medtronic closed it.

For the record Mr D Cameron Findlay was the contact officer on the merger agreement and was informed of (numerous) problems at Kanghui.

There was one way that the senior people at Medtronic could protect their reputations and their career. Two words of advice - but it is too late now. For the record here it was:

Call Kroll.




John

17 comments:

Robert in Chicago said...

That's just mean. Even Cam's brief bio is enough to show that he has to be very politically astute and good at thinking strategically about his own self-interest as well as being generally very bright. Chances are near zero that he didn't cover himself by passing on at least the gist of the concerns. So if his boss has already signed the deal and still wants it done, what is a poor general counsel to do?

John Hempton said...

Not mean. He was breathtakingly patronizing. Just flat patronizing.

John

Anonymous said...

Were you short KH?

John Hempton said...

Yes. Maybe that is why Cam was so dismissive...

J

Anonymous said...

i guess your article wasn't BREATHTAKINGLY patronising -so I can see why you'd be a little hurt !

MaysonicWrites said...

More likely he just suffers from smartest guy in the room syndrome.

Anonymous said...

Hi John,

I have another game for you to play. It's called the Mushroom Game. The idea is to spot the CEOs who burst out of obscurity by really outperforming their peers in a completely unexpected way (ie, in a way that isn't already priced into the stock.)

You get double points if the individual that you picked turns around a formerly struggling business.

You get a massive TEN X if the individual (or their firm) achieves minor celebrity status on the way.

Please send all credible tips, especially those backed by apparent inside information, to me via private correspondence.

Regards,

Peter.

Anonymous said...

John,
Are you alluding to Kroll being the go to source for this particular transaction, or as a general source for transactions with fraud components? Why Kroll and why this transaction, versus other transactions you have followed (CCME, FMCN, etc)?

Anonymous said...

Sorry John, you were wrong on this one. IDG Capital Investments has a position in KH. Therefore, KH is legit.

IDG's due diligence is the best in the business, and they have NEVER invested in a Chinese company that ever had any problems with fraud.

When investing in Chinese small-caps, the only question you need to answer is this: has IDG invested in this company?

http://www.idgvc.com/en/investment/

Anonymous said...

IDG was involved in both Allyes and Framemedia (FMCN acquisitions), the former of which was among the more breathtaking examples of insider enrichment at Focus. So whatever reputation they may otherwise have had is somewhat soured by that association, IMO.

Anonymous said...

IDG never invested in Frame Media/Thinking Screen Media, nor did they invest in FMCN. They did invest in Allyes.

IDG's due diligence of Allyes was sound. They were a real company, they were profitable, and their shareholders made a ton of money when the company was sold.

When FMCN bought Allyes, Neil Shen pocketed around $1 million for himself, out of a purchase of $297 million. Source:

http://www.valuewalk.com/2011/12/magically-circular-world-neil-shen-venture-capitalist/

So yes, FMCN's shareholders got looted, a little bit. But this has nothing to do with the legitimacy of Allyes or IDG's due diligence. I would assert that Allyes' management did nothing wrong. This was insider trading on the part of FMCN's managers, who owned shares of Allyes (but controlled less than 0.5% of the company).

Frame Media was a Massachusetts-based startup company, and I don't see any evidence that IDG ever invested in them. Regardless, I don't see any evidence of fraud in that case either.

http://www.boston.com/business/technology/innoeco/2012/08/frame_media_where_two_startups.html

http://www.xconomy.com/boston/2010/04/29/thinking-screen-pulls-in-2-million-looks-to-apple-ipad/

http://notablecalls.blogspot.com/2011/11/focus-media-nasdaqfmcn-waters-are-clear.html

buyersstrike said...

@ Anonymous 3:04

You are making the classical error in critical thinking known as the argument from authority.

IDG, and funds in general, famous investors, billionaires, etc., are just as prone to errors as anyone else. China Water, Sino-Forest, China Agritech, Longtop, and so many other frauds that ensnared supposedly "smart" money, illustrate that point quite well.

In fact, it could be argued that the hubris displayed by such investors makes them more likely to be defrauded, not less.

Anonymous said...

Frame Media/Thinking Screen is an entirely different company with no connection to FMCN or to China, for that matter. Shanghai Framemedia is the poster frame business of FMCN and it was in fact an IDG investment. That doesn't mean it wasn't a real company or that there was anything fraudulent prior to Focus' involvement, but IDG's connection to Focus management through 2 separate transactions calls their business ethics into question.

http://www.idgvc.com/en/investment/30/index.html

Furthermore, the shenanigans around Allyes weren't limited to Shen's benefit, as even the article you link to points out. The main insider enrichment occurred when Focus executives bought 38% of the company at a $35m valuation 6 months before selling the company for $200m. Now, it's possible IDG had already moved on by then, but again the point is these guys are connected.

Anonymous said...

John, it looks like KH is still trading - the books closure would appear to just be for creation of new ADRs.

P.S. Take a look at VISN for another example of FMCN skullduggery. This time it's magically disappearing cash that was supposedly invested in VISN for a 15% stake, just as they were being sued for non-payment of deferred consideration for an acquisition....

Anonymous said...

@ buyersstrike:

I understand the "error of authority", and that is why I have studied this issue extensively, to avoid falling into it.

The top 4 auditors have been fooled on many occasions by Chinese frauds. Starr has been fooled. Many VC investors have been fooled. Hank Greenberg has been fooled. Several top underwriters have made incredible errors by getting involved with IPO's of Chinese small-caps which later turned out to be frauds (Citi, Goldman Sachs, etc). The list of high-profile investors that have been burned is very long indeed.

IDG has never made these types of mistakes. They have invested in dozens, if not hundreds, of Chinese small-cap companies, and have never run into any of these problems. That is a sample size that is too large to ignore. Obviously their due diligence is on another level. And that is why they are in a class of their own.

@ Anonymous 10:47:

You are correct that IDG invested in Frame Media, and it was a different company from the one I mentioned earlier. My mistake. I cannot find much information on this Frame Media. If you have any links with more information, it would be appreciated.

"That doesn't mean it wasn't a real company or that there was anything fraudulent prior to Focus' involvement, but IDG's connection to Focus management through 2 separate transactions calls their business ethics into question."

I don't think you can call their business ethics into question without more substantial evidence.

Was there any proof of wrongdoing on the part of Allyes or Frame Media?

If the only wrongdoing was on the part of the aquiring company (FMCN), this does not say anything at all about IDG or their due diligence/ethics.

Arthur Kuan said...

http://www.nyse.com/about/listed/lcddata.html?ticker=kh

John: what's your source that KH holdings is closed?

Anonymous said...

onoyvisBank of America Merrill Lynch, Deutsche Bank, UBS to Help Finance Focus Media Buyout -Sources

Just saying seems like it will go through

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