Discovering more about a private IR eye
Who do you call if you're a US CFO looking at a Latin American privatisation and interested in getting sensitive questions answered? After all, you don't just want to check out the integrity of the financing and operating capability of the firm; you also want to verify whether rumours about the CEO's life as a drug tsar have any basis in the truth - and discover whether the bidding has been rigged by the minister's wife's cousin.
In this situation, most CFOs might expect to rely on their investment bank for reassurance, but more and more are nowadays looking to people like Jules Kroll, head of the world's foremost private investigation team.
One reason for corporate executives to make the pilgrimage to Kroll's nondescript mid-town Manhattan office is his astounding credentials. They remember the segment on CBS news programme 60 Minutes, where Kroll commented on his part in locating Saddam Hussein's hidden treasure for the Kuwaiti government. Kroll wove his way through a maze of dummy firms and dozens of foreign banks, finally pegging Saddam's personal fortune at $10 bn. Looking into the likes of Saddam's Panamian shell Montana Management, and its stake in French publisher Hachette, Kroll's global team of $1,500-a-day agents met the challenge.
More recently, Kroll has been spotlighted on a high-profile case for the Russian government, which believes that an estimated $6-8 bn was spirited away from the country in 1991 alone. The culprits were the directors of state enterprises fleeing from impending privatisations, and Russia wants Kroll to bring its money back home. Having handled the Jean Claude (Baby Doc) Duvalier and the Ferdinand and Imelda Marcos cases, Kroll seems to have a particular niche when it comes to emerging markets and the tracking of missing billions.
'What you have in the CIS is a bare-knuckled brawl for power. Resolution of this struggle involves killing or intimidating other individuals and corporations as well as full-scale fraud,' says Kroll, who seems non-plussed by the goings-on in Moscow. 'My question is what can foreign investors do in a market like this? What do they do in a country where the transfer of wealth and ownership through midnight privatisations has created a society that has a different level of permissiveness? Investors must start from the fact there has been cataclysmic change. Yet the reality is that investors will make decisions on the basis of stability and return. They are not going to worry about how people obtained ownership of properties.'
But you don't have to be a Kuwaiti king or a Kremlin bureaucrat to get Kroll working on your case. The greatest part of Kroll Associates' $50 mn in annual revenues comes from work done for investment managers and commercial banks. In the case of underwritings, the bills are often paid by issuing companies. And Kroll is not the only one in line for such exclusive mandates. Firms like Investigations Group Inc and Business Risk International have been a thorn in Kroll Associates' side, though they remain much smaller than the 22-year-old investigations specialist.
Kroll's roots are undoubtedly financial in nature. While the likes of Merrill Lynch, Morgan Stanley and Goldman Sachs are tight-lipped about whether or not they have used his services, Kroll Associates has made a name for itself in some of the biggest M&A battles. Kroll first attracted the attention of Wall Street with his work in the Diamond International and Foremost-McKesson cases as long ago as 1979.
Under attack from Sir James Goldsmith, the Diamond paper company hired Kroll to defend itself, as did Foremost-McKesson, a wine, spirits and pharmaceutical distributor when it was threatened by Miami raider Victor Posner. In the end, Goldsmith proved unstoppable for Diamond, but a key Posner weakness was uncovered by an aerial camera. The camera revealed that the inventories of Sharon Steel, the vehicle for the proposed take-over, were woefully overstated. This revelation, among others, brought Posner to the attention of the Internal Revenue Service, pulling his gaze from his M&A quest and saving Foremost-McKesson from takeover.
After these two cases, it wasn't long before customers like junk bond king Michael Milken, then with the erstwhile investment bank Drexel Burnham Lambert, came knocking at his door. By the middle of the rock and roll 1980s, Kroll was going head-to-head with takeover maverick T Boone Pickens. Enraged by Kroll's surveillance, T Boone pushed a local Texas court to slap an injunction on him, stopping the investigation dead in its tracks. The ruling was later overturned by a Delaware court, and Kroll was back to work before too long.
In many cases, Kroll's investigators have to deal with individuals. 'I have contended for the last 15 years that there is a great deal of time spent looking at numbers, and little time spent looking at people,' he says. 'Whereas people are not usually the issue at a large company, they are very important for investors dealing with less-established entitites driven by one or two individuals. Investors have to know whether these fellows have a history of responsible actions. They need comfort that these central personalities are not related to people in the drug business or are not receiving resources from some unknown source.'
Nonetheless, Kroll insists on fair play. 'There is an open door policy. We have made errors in the past, but we have also made it clear if someone feels they are not getting a fair shake they can come talk to us.'
As to how many transactions can stand up to this muster: 'A surprising number pass, even in emerging markets,' adds Kroll. 'Still, I hope emerging markets get to the point where the US markets are now. The current list of ADRs is a very select group, and the standards of evaluating those companies is close to those that apply to US companies. But when you start supplying emerging markets investments in any quantity, I do not believe the regulatory agencies are equipped to handle that kind of watchdog work.'
Emerging markets have risen in prominence in the Kroll business mix, taking up some of the slack left by the reduced frequency of hostile M&As. To support this effort, Kroll works out of regional headquarters in Hong Kong, Sao Paolo, Manila and Moscow. And the marketing team has come up with a range of services, from assisting investment managers and banks to evaluate emerging market securities to looking into mega-projects in the infrastructure area. With US international investment growing, Kroll sees this business as a growth area.
'The whole IR emerging markets area is fascinating,' says Kroll, whose average bill for an emerging markets due diligence exercise is in the $20,000-50,000 range. While IR firms deal with the process and package the information, Kroll likes to say that he 'develops' information, sometimes in conjunction with IR firms. 'The first rule of investment is to know as much as you can about the investment. But the numbers never tell the whole story,' he says with a curt smile.
There is little comfort for fund managers and investors in emerging markets, according to Kroll. 'It could be a complete slaughter,' he nods. 'The difference between investing in a country where rules are clear and one where they are not is substantial. While I feel there is an obligation on the part of fund managers to know more about the people they invest in, I know there is little original research. The ignorance level is high, and the herd mentality has led people into markets they know little about. Some make up for this by sending someone quarterly for a week to check out the market. That is superficial. From my view, there is an over-reliance on gathering information from dealmakers. Yet if you invest in the wrong people, or the wrong country, your entire investment can go down the pipe.'
In view of the investments that are being made in these emerging markets, Kroll feels a certain portion of money headed into a fund or index should be dedicated to looking at the key individuals and the socio-political dynamics of the country. 'If the various fund managers demanded this information be in place as a pre-condition, and if people needed capital badly enough, they would comply,' concludes Kroll. 'I am not raising a moral question. I only raise the question as to whether all this is safe. Are these prospectuses that are being put together any security for US investors? The answer is that they are probably not up to the quality of prospectuses you would see over here, and they may not cover all the aspects you need to know.'