Due diligence at Portsmouth

Reader question:

Please explain “due diligence” in the following passage (Portsmouth in dark again as bidding consortium gets new backer, April 6, 2010, Guardian.co.uk):

On the opening day of his due diligence at Portsmouth Rob Lloyd, who represents a mystery potential buyer, has informed the club’s administrator of “a change in his funding”, according to Andrew Andronikou, the head administrator. Andronikou said he hoped to send proposals out to Portsmouth's creditors over the next week or so.

Regarding the change of identity of the buyer represented by Lloyd, Andronikou told the Guardian: “We're trying to discover who the new party is. We were told the identity of the original one. But now there’s been a change in [Lloyd’s] funding, a change to his purchaser.”

My comments:

This is a question I’ve answered once (hit this link - http://www.chinadaily.com.cn/language_tips/columnist/2007-11/20/content_6266866.htm), but it’s a good question and so I will answer it again.

An idiom, by definition, is an expression whose meaning one can not always infer directly from the individual words involved. Due diligence, though, is not one of those. As a matter of fact, you can pretty much figure out its meaning by understanding each of these two words.

In short, “due diligence” means “diligence” that is “due”.

Diligence is the effort and care paid to some task by, say, a diligent student. The diligent student always does his homework and does it with care. He burns the late night oil if he has too much of it to handle during the day and evening. And he does not make any mistakes, either. Understandably the diligent student is the favorite of strict teachers.

Due? That means right, proper and expected, as in “with due care and attention”, “due date”, “due process” and “in due course”.

Hence, therefore, due diligence means the proper effort and care one is obligated to pay to a certain enterprise.

Enterprise is actually the right word here because this phrase is used predominantly in business, and particularly in mergers and acquisitions. In the Portsmouth example on the top of this page, “on the opening day of his due diligence” simply means Rob Lloyd, representing an unnamed buyer, comes in to do the proper investigations required in order to reach a conclusion whether Portsmouth the football club is worth buying, after all.

Geely, for another example, last month bought Volvo and it’s only reasonable to assume that both parties have done their due diligence, too. Geely must have done thorough analysis to see whether the one-time world-beating Volvo remains a viable, or rather revivable, product because US$18 billion is a lot of money to fork out for a loss-making over-the-hill luxury brand. Volvo, on the other hand, must have done its due diligence, careful investigations that is, to see whether it’s actually to its advantage for it to marry low – so very low in the eyes of some – to a provincial nobody from Zhejiang, China.

Anyways, here are media examples of “due diligence”:

1. When buying a business you want to examine your goods before you pays your money. Perfectly reasonable in any acquisition or merger.

Nobody wants nasty surprises and to protect against them takes a bit of work.

In essence, the buyer of a business is looking for reasons to not invest in the company.

Due diligence involves looking closely at all the company's records: statutory financial statements; internal process controls; management accounts, budgets, analyses and projections/forecasts; contracts with employees, suppliers, customers and others; insurance policies... and assembling the jigsaw.

- It’s what you don't know that can hurt you, Experienced-people.co.uk, undated.

2. Hong Kong’s market regulator is examining whether international investment banks and local sponsors carried out adequate due diligence on the $31.8bn in initial public offerings in the territory last year.

The move reflects the Securities and Futures Commission’s concern that IPO sponsors allowed unsuitable companies to float in Hong Kong as it overtook London and New York to become the biggest IPO market.

“The market is hot and when the market is hot there is a temptation to relax standards,” Martin Wheatley, SFC chief executive, told the Financial Times. “The concern is to keep the quality level high so we don’t have a number of failures in two or three years’ time.”

He said the SFC would launch a formal probe in coming months but an initial examination had raised questions about a handful of the 73 IPOs in Hong Kong last year. Brokers would be asked to provide detailed records of IPOs they have arranged over the past 18 months so they could be audited for compliance with regulations.

Over the past two years several companies had floated shares in Hong Kong and suffered significant problems, he said, suggesting that their IPO prospectuses had failed to give a true picture of the businesses.

“Anything where something very unusual happens in the first year after a listing raises alarm bells,” Mr Wheatley said, citing profit warnings or changes of auditor as examples.

- HK market watchdog probes IPO due diligence, FT.com, March 22, 2010.