x Abu Dhabi, UAETuesday 16 January 2018

Damas may find good luck is better than gold

The former family business that lost its direction in the giddy days of IPOs and exuberant expansionism is a cautionary tale of the times.

The Irish have been making Claddagh rings for hundreds of years. They are supposed to bring luck and love. No surprise then that they proved an instant hit for consumers in a country long blighted by the curse of invasion, emigration and Eurovision.

Four hundred years on from when the first distinctive heart-in-hand rings were made, the cash registers of jewellers from Dingle to Dundalk sing with every busload of tourists that pulls up. Luck and love are always in demand. That is the beauty of the jewellery trade. It is as dependable as the undertaker business but more fun for the salesmen and with better staff discounts. That is one reason that the transformation of Damas International from a regional retail giant into a regulatory whipping boy has been so hard to watch.

Unprecedented fines were handed down this week to the company and the three brothers who headed it. The brothers were also ordered to repay the company Dh365 million (US$99.3m) of cash and almost two tonnes of gold after a five-month investigation by the Dubai Financial Services Authority (DFSA) into unauthorised transactions. Everyone is captivated when corporate titans are laid low occasionally or when captains of industry are forced to eat humble pie now and again. The Damas saga may have satisfied some sense of schadenfreude even before we read about the missing gold.

But there is something very sad about this story, and not just because so much was squandered from a century-old business in such a short period. Some will inevitably see it as a simple tale of greed - how the directors of a public company were allowed to spend shareholder funds on seemingly random investments in areas where they had little expertise. Why were they building towers when they had spent the previous 100 years making bangles and bracelets?

Seen in a different way, this is a modern-day parable for an era of unbridled leveraging that is now unravelling around the region. Damas is just one of the strands in that process. There are many other long-standing companies that temporarily strayed from the path of the business they knew best and are now struggling to find their way back, saddled with debts they cannot repay and assets they cannot sell. It is the corporate narrative of our time.

The Abdullah brothers are in some ways the prodigal sons of the era. Aside from the unauthorised transactions detailed by the DFSA this week, their biggest transgression was to use company accounts in the same way they had done before the company went public. This point is made in the report published this week by the regulator. The brothers' story shows what can happen when solid companies that have grown organically for generations are given overnight makeovers by advisers to become publicly traded entities with hundreds of millions of dollars of shareholder funds to deploy.

Back in 2005 when the Gulf's frenzy of initial public offerings was at its peak, armies of investment bankers, lawyers and accountants earned fat fees from telling family-run groups that what they really needed to keep up with juggernaut growth of the time was to go public. It was all the rage. The steady, single-digit growth that had served such businesses for decades was suddenly seen as a bit last year.

For other family businesses with ageing patriarchs who worried about handing over the keys of the shop to junior in his Lamborghini, going public also had the more practical appeal of preserving their legacy; what they had carefully built would be underpinned by the governance structures and reporting rigour demanded of publicly traded companies. Back then, the first question of every business reporter meeting a local chief executive was: "Are you planning to sell stock to the public?" And as often as not, the answer was yes. Eager PR men would send out releases about how such and such a share sale had been several hundred times oversubscribed. It was "fill your boots" time.

The really bad luck for the region's economy and Damas International was that this period of rapid stock market expansion coincided with similarly unsustainable inflation in the property market and an abundance of lenders happy to grant loans on terms that would be unthinkable in the post-Lehman Brothers world. Damas International found itself at the convergence of these three paths. Five years on, it is clear that share sales have not always proved to be the panaceas they were made out to be, either for some of the companies that have gone down that road or for the investors who have bought the stock.

The warning signs were clear at Damas even before the company had finished its book building process to determine investor demand for the then soon-to-be issued stock. "On or about 1 July 2008, Tawhid Abdullah [the former chief executive of the company] was informed by the joint global co-ordinators - that it was unlikely that the Damas International IPO would be fully subscribed by the book building process," the DFSA said in its report, the findings of which, it is important to note, Damas does not contest. That encouraged Tawhid Abdullah to seek additional investment from Dubai Investment Group, a unit of Dubai Holding.

About $80m belonging to Damas itself was transferred to Dubai Investment Group (DIG), and that money was then used to buy thousands of shares in the Damas International public offering. "Without the purchase by DIG of 100,000 shares, the free float requirement would not have been met and Damas International shares would not have been able to be listed on the DIFX [Dubai International Financial Exchange]," the regulator said.

Investors have a right to know how such actions occurred. The DFSA report is a good starting point, but so many questions remain unanswered about the post-IPO history of Damas International, not the least of which are: why were the company's board and its auditors not alerted sooner to the practices outlined in the regulator's report?; why didn't anybody pipe up when Tawhid Abdullah borrowed nearly two tonnes of gold from the company's holdings?; or why did the audit committee of the company not meet on a single occasion during the entire 2008-2009 financial year?

Damas this week told investors it had undertaken to "apply the learnings" of the DFSA report, outlining what it described as "these historical incidents". As the company looks to its future it will need to refocus on the business it knows best - making and selling jewellery, while investors will be hoping that the DFSA report marks the end of Damas's post-IPO forays into industries it would have been better advised to avoid.

Now the company needs all the luck it can get. Maybe it should start making Claddagh rings. scronin@thenational.ae