Case Study: Due Diligence

Artus Group was assigned a due diligence investigation on a young U.S. software company, which was in its final stages of a $50 million private equity investment deal with commissions and bonuses presumably already calculated. The client expected a “rubber-stamp” due diligence investigation, however, certain adverse information gradually came to light.

The client was pushing for a final report as the date of the investment deal approached, but Artus Group investigators had an intuitive feeling, even though the public record and media was not necessarily adverse. The problem stemmed from the subject’s very common name – similar to ‘Robert Jones’, for example – and disseminating the thousands of possible public records was an enormous task. Of greater concern, however, was that Artus Group believed the subject’s father, of the same name, was an Australian metals mogul who had been convicted for bribing an Australian senator with prostitutes and money. Linking the father to the son (and if so, determining its possible relevance) was a daunting task, with a fast-approaching deadline.

Artus Group reviewed thousands of documents in an attempt to establish a link between the father and son. Finally, investigators identified a 1998 filing submitted to the Securities and Exchange Commission (SEC), which listed an address for the father, that the son was known to have used between 1997 and 2001. Further inquiries revealed the father was a major private angel investor in his son’s US company, and the connection quickly caused the deal to unravel.

What became of this client? They must have been delighted, of course. This was not the case. The deal fell through, commissions and bonuses were lost, and both lead analysts were fired for their roles in letting the deal get so far and failing to adequately conduct their own due diligence.

Remember: An Artus Group due diligence is not a ‘rubber stamp’. Be prepared for all possible outcomes.