Take the first step in M&A

The most important work before the acquisition is due diligence, also known as due diligence, which refers to the buyer's assets and liabilities, operating and financial conditions, and legal relationships of the target company during the acquisition process. As well as a series of investigations into the opportunities and potential risks faced by the target company, these investigations are usually commissioned by independent professionals such as lawyers, accountants and financial analysts to decide whether to implement the acquisition.

Generally speaking, due diligence conducted by professional institutions includes financial due diligence, tax due diligence, business due diligence and legal due diligence. it's not true. In fact, there are cases where due diligence is a mere formality, and some investigations are just to verify some data, or even to provide evidence for a "correct" answer. Moreover, these due diligence sources of information are very limited. According to an informal survey by Accenture, only 10% of companies use four or more external sources of information in the due diligence process. For a project involving tens of millions or even hundreds of millions, it is not due diligence to only limit the investigation to a small area.

Since Shenzhen Taitai Pharmaceutical Co., Ltd. (hereinafter referred to as Taitai Pharmaceutical) acquired Haibin Pharmaceutical Factory in 1997, it has started a strategy of expansion through acquisitions. Especially in 2002, successively acquired "Eagle Brand American Ginseng" and listed company "Livzon Pharmaceutical", which have extensive influence in the health care product market, which attracted considerable attention in the industry. Judging from the latest data, the acquisition of Taitai Pharmaceutical has achieved satisfactory results: in 2002, when the sales of the company's leading products " Taitai Oral Liquid" and "Jingxin Oral Liquid" declined, due to the acquisition of "Eagle Brand American Ginseng" "Instead, the company's total sales increased by more than four percentage points. The achievement of these achievements is inseparable from the large amount of work done by Mrs. Pharma in the early stage.

Before becoming the manager of the investment department of Mrs. Zhong Shan, Zhong Shan had 6 years of experience in due diligence at Deloitte, but he still believes that conducting research from the perspective of a company is very different from conducting research from the perspective of an accountant. A big difference, a little careless, will bring huge losses to the company. Zhu Baoguo, chairman of the company, also said: "Mrs. Pharma is very, very cautious before making any acquisitions. It must be evaluated in all aspects that the acquisition will bring benefits to the company in the future, and then the acquisition can be started."

Due Diligence Investigate, start early

"I prefer to refer to internal investigations before formal due diligence as due diligence," Zhong Shan has his own set of views on the scope of due diligence. Mark L. Serovo, a due diligence expert from Boston Consulting Group, also believes that due diligence is a "long corridor", and the scope of investigation should also be broadened to include the company's asset status, orders and contracts in the hands of the company. The acquirer needs to know whether these orders will "fly" during the merger, as well as the quality of the management team and whether they will stick around after the merger.

Usually, due diligence involves a lot of analysis and judgment of financial statements, but in the context of mergers and acquisitions, financial analysis and investigation alone are obviously not enough. The practice of Mrs. Pharmaceuticals is to start an internal investigation immediately after discovering the prey. These investigations first revolve around the target company's products. The tasks include: What are the company's products? Which are the leading products? How profitable is each product? "We don't want a company to have too long a product line, and each product can only achieve sales of 100,000 or 80,000. Our ideal company should have one or two leading products that rank high in the industry, Eagle Brand It's such an example, it's a near-perfect target." Zhong Shan still maintains a sense of satisfaction when he looks back on the acquisition of "Eagle Brand American Ginseng".

The individuals involved in the internal investigation are from the Investment Department, Marketing Department, Sales Department, and R&D Department, which communicate information to each other. The marketing department will investigate the performance of the target company's products in the market, including the popularity and reputation of the products. Because they have been close to the market for a long time and have a fairly thorough understanding of the products on the market, their judgment is very helpful for the decision-making of the investment department; the sales department can conduct research on products from distributors, retail terminals and customers, such as this product Is it good to buy? How have customers responded? The first-hand information on these issues can be obtained from the front-line sales staff, and this information can play a key role in verifying the financial data of the target company in the later stage; How is the technical content? What are its advantages? Will these advantages be replaced or eliminated by technological innovation in the future? In addition, Mrs. Pharma will also invite some market research companies to do market research to further verify the data.

"In short, these investigations point to one direction: is this project worth doing?" Zhong Shan attaches great importance to the opinions obtained from relevant departments. In his opinion, these come from the analysis of the product itself and directly affect a project. whether to proceed. Usually at this stage, the relationship between the acquirer and the acquiree is still ambiguous, and it is not clear whether the acquisition is confirmed, so it is very difficult to obtain the internal information of the target company. So, you have to judge for yourself. "These internal investigations are not necessarily written in the form of formal reports, but they are really valuable," Zhong Shan said repeatedly, stressing the importance of internal investigations.

Forcibly disclose and avoid traps

After clarifying the acquisition intention, the acquirer will form a due diligence team to formally conduct due diligence and pass a series of legal documents, including letters of intent, confidentiality agreements, and framework agreements and so on to determine the relationship between the sale and purchase. At this point, the scope of due diligence has expanded to include topics such as the company's financial status, management level, customers, competitors, supply chain, legal relationships, and related party transactions.

Some acquired companies will deliberately swallow some "poison pills" in order to make the acquirer "can't eat and walk", but after the acquirer takes over, the poison strikes, which makes the acquirer shout fooled. Hong Kong's Zhaofeng Company, which was very ambitious in the ceramics market, had taken such a medicine. In 1995, Zhaofeng Company carried out a series of large-scale acquisitions, including the acquisition of Heimsoth KG, the world's largest kiln manufacturer, and the acquisition of Netzsch Selb. Zhaofeng Ceramics hopes to pass These expansions fulfill the dream of a world "ceramic king". Unexpectedly, after the completion of the acquisition, the company found that the financial situation of Neqi Group did not match the situation at the time of acquisition. Zhaofeng Ceramics immediately began to remedy and even liquidated its affiliated companies, but it still could not prevent the deterioration of the situation. In 1996, Zhaofeng suffered an operating loss of more than 860 million Hong Kong dollars! "Under the current social conditions, business ethics and the operating mechanism of the market are still very imperfect, and behaviors that do not respect business ethics are still very common. Even after the acquisition contract is signed, there will be variables," Zhong Shan felt deeply. say. The period between the signing of the acquisition contract and the takeover by the acquirer, known as the transition period, varies from one to three months. During this time, it was also common for the acquiree to manipulate its assets. These “manipulations” included asset transfers, intentionally causing operating losses, entering into product agency agreements with third parties, concealing debts, and so on. These "actions" are unavoidable, such as concealment of debts, debts that were obviously not discovered during the investigation, but after the acquirer entered the company for a period of time, suddenly a creditor came to collect the debt. These cases that occurred from time to time in reality caused the acquirer a headache. .

"Our solution is to add an appendix to the acquisition contract, which is the 'disclosure letter'," Zhong Shan said. "In the 'disclosure letter', the company's liabilities, lawsuits and other matters must be disclosed, and the seller must ensure that these The matter is not concealed from the buyer. In addition, the behavior of the seller before the delivery period is also restricted. For example, if something that is not included in the 'disclosure letter' occurs in the future, the buyer can recourse to the seller, thus avoiding the need for post-acquisition The trap."

Related party transactions, specific analysis

During due diligence, there is another very important investigation item, which is related party transactions. In this regard, Zhong Shan said frankly: "Affiliated transactions are very common in enterprises, especially for some enterprise groups that have existed for a long time, it is impossible to have no related transactions." Many related transactions are naturally formed in history, because In an enterprise group, each subsidiary has its own strengths and can play a synergistic role through related transactions.

For the acquirer, first of all, it is necessary to clarify what is the most attractive thing about the target company, which is the asset? is the product? Or profit or other characteristics, which must be figured out. If the interest is profit, then the composition of profit must be carefully analyzed. For example, if 30% of the sales of an enterprise are completed through affiliated companies, and this 30% is a large amount, then it must be analyzed: whether the price of the sales completed through affiliated transactions is significantly higher or lower than that market price? If sold to another company, how long is the receivable cycle? How long does it take to sell to an affiliated company? By comparing the obtained data, it is possible to judge whether the related party transaction has an impact on the profit of the enterprise after the merger, and to what extent.

Affiliated transactions may contaminate a company's profits. Some companies artificially raise the profits of their subordinate companies in order to sell their subordinate companies at a good price. For example, the power and electricity of a manufacturing enterprise are purchased from power plants belonging to the same group. In order to sell the enterprise at a good price, the parent company may make the power plant sell electricity at a very low price. In such a situation, the acquirer must analyze during due diligence. Will this offer continue after the acquisition is completed? If it does not continue, can another power plant be found to generate such profits?

What kind of suppliers the target company chooses also has an impact on profits. Zhong Shan took "Eagle brand foreign ginseng" as an example, and made a detailed analysis of this issue: "We know that the main raw material of Eagle brand is ginseng, and we purchased the factory of Hong Kong Health Medicine in Zhuhai, which purchased raw materials. 80% of them come from the head office in Hong Kong, and the head office imports raw materials from the United States, which is a kind of connected transaction. At this time, we will compare the price of ginseng imported from the United States with the current market price. Eagle has Which suppliers? If we no longer use these suppliers, what will be the impact on the gross profit of the product? After synthesizing various data, we found that although Eagle has many related transactions, it does not have much impact on us. Even if the original supplier is no longer used, because there are many suppliers in the foreign ginseng market, we can even buy ginseng of the same quality at a lower price."

"However, if the transaction is too close, we I will try my best to avoid it,” Zhong Shan pointed out in particular that some related-party transactions have the trouble of being constantly cut off and chaotic. There was once a company that recommended high-quality assets of its subordinates to "Mrs. Pharmacy", saying that the parent company could shoulder all the burden of the company by going public. Zhong Shan said worriedly: "It can do this in order to go public and sell it to us in the future. Will he do the same? It worries us." Eventually the wife gave up on such a business.

There is also a situation where the acquirer clearly knows the existence of certain related party transactions, but after weighing the pros and cons, the acquirer will make appropriate concessions. In 1988, in order to expand its share in the chocolate market, Nestlé launched the acquisition of the British Rowntree Company (Rowntree), which produced Kit-Kat chocolate with the largest market share in the UK. In a pre-acquisition investigation, Nestlé learned that Kit-Kat's U.S. distribution rights had been permanently sold to Nestlé's rival Hershey as early as 1970. The "voluntary sale" or "Hershey's" change of controlling interest, Nestlé can do nothing about it, but it has not been too entangled in this issue. Until now, Nestlé has still not taken back the distribution rights of Kit-Kat in the United States. Fortunately, Kit-Kat has brought considerable benefits to Nestlé outside the United States, making up for the regret that Nestlé cannot exclusively enjoy Kit-Kat. In this regard, Mauch, the then CEO of Nestlé, said: "Finance is not the only factor we consider, the key is that we get the brand." Analysis and judgment of economic behavior itself. The main metric is: what type of connected transaction is this? Is the pricing reasonable? Is the transaction real? How big is the transaction volume? Has the profit been transferred? "If these problems are clarified, connected transactions will no longer be scary," Zhong Shan concluded.

A good start is half the battle. Due diligence can eliminate hidden dangers and find traps for enterprises to complete the acquisition, and finally achieve the successful connection between the target enterprise and the acquirer after the acquisition. To broaden the scope of due diligence as much as possible, and to understand the target company of mergers and acquisitions from more channels, its significance is far more than simply understanding a company from financial statements. The possibility of being manipulated, while the economic behavior of the business itself does not lie, requires the acquirer to keep its eyes open and put the pieces back together.