‘Big Deals are generally made in heaven’, meaning in clear text a particular deal is negotiated between principals, who are in a hurry and believe it they know all the facts. Under such circumstances due diligence usually takes a back seat.
Due diligence is now being questioned in the latest scandal involving Alibaba’s US$ 800 million acquisition of China Vision. The management of the new company, Alibaba Pictures has uncovered ‘non-compliant treatment of financial information’ and ‘insufficient provision for impairments of certain assets’.
Alibaba states that it had difficulties integrating Alibaba Pictures’ financial reporting. The company also claimed that they lack substantial experience in integrating major acquisitions. A separate but major issue that Alibaba should also worry about is how the auditing of Alibaba Group will work. New Chinese regulations may require non-mainland firms audit Chinese firms through cooperation with local Chinese auditors, while Chinese secrecy laws disallow information to be passed to overseas regulators. This does not bode well for the IPO. Caveat Emptor.