Business Since reform and opening up of China thirty years ago, a large amount of foreign investments has rushed into this country. Not only continuous heated economy does it produce, but also many new words does it bring to China. "Due diligence" is just one of the new phrases which come from overseas. Back to the 1990s, the public might know very little about the phrase. However, with the increasing IPO and M&A, the phrase came up frequently in legal documents and news reports in recent years. But how do due diligence investigations perform in real life, – is it a shell without much content or an effective method in M&A, remains as a question. From this point, the instant essay will analyze the due diligence investigations in M&A in the coming paragraphs. Concerning the origin of the phrase "due diligence", the widespread use of it was attributed to US Securities Act of 1933. According to this Act, the broker dealer, who was accused by investors for inadequate information disclosure, could be exempted from liability, as long as he conducted "due diligence" investigation and disclosed all the information he found about the company whose equity the investors bought. 1Later, conducting a due diligence investigation became the practice standard of the entire broker dealer community in stock offerings, then it spread into the field of M&A, and gradually was applied to other situations also. Due diligence investigations in M&A are usually conducted by professional people employed by the buyers (sometimes it is the targets who have the burden of conducting due diligence investigation in M&A; see section 13 of "Tentative Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors"). This can be explained by the risks of takeover itself to the buyers. Lack of deep investigations into the target will probably produce traps of M&A, such as hidden legal or financial problem of the target. Lawyers, CPAs and industry analysts are engaged in due diligence investigations which cover the target’s finance, corporate governance, legal compliance, continuous operational ability and etc. The investigations aim at helping the buyers understand the internal and external conditions of the targets, measure their development and risks, and decide whether to activate the takeover actions and how much they should pay for the takeover. Thus, before the deals, most potential buyers will have due diligence investigations conducted into the target companies. An empirical study by a German scholar on 1932 enterprise sales between the year 1997 and 2000 indicated that a due diligence investigation was conducted in 74% sales. Among these investigations, the major purpose of buyers (45%) was to reduce risks. To define value of the targets and price of the deal, to analyze the targets, to analyze the future of the combined enterprise could also explain why the investigations were conducted.2Shown by this, one of the main functions of due diligence investigations is to find out potential problem of the targets so as to manage buyers’ risks better (of course, the investigations also provide the targets with the opportunity to know their precise conditions from another angle). In other words, in most circumstances when the potential buyers employ professions to estimate the situation, due diligence investigations should serve for the buyers as the "supervisors" digging out the targets’ related information and discovering potential problem to minimize risks of the deal. The professional staff conducting the investigations should be diligent and responsible for offering comprehensive objective due diligence reports to protect the buyers from making wrong decisions or paying an unreasonably high price. However the real cases do not necessarily reflect the theory above. Due to the relation between due diligence investigations and the final price, parties of takeover hold different expectations. Buyers hope to find out problems to reduce the takeover cost, while targets try to hide the problems to raise their income from the deals. According to a survey by GE Capital, the failure ratio of M&A in making strategies, seeking potential targets, and conducting due diligence investigations before takeover is approximately 30%.3Another investigation by Bain & Company into 250 managers in charge of M&A suggested: half of them accused due diligence investigations of ignoring major problems; also half regarded it as little use in seeking truth; two thirds of the surveyed agreed that the procedure lead to over estimation.4In short, due diligence investigation which is supposed to reduce the takeover risks and cost, act in fact adversely to the original purpose. To be worse, in some cases of M&A, the existence of due diligence investigations which excel like shields, conceal the existed or potential problems and risks, and assist in obtaining the targets higher price than their real valuedue diligence investigations actually perform as the guardians of the targets. It is not difficult to find out that there are problems both in procedure and content of due diligence investigations in practice. As to the source of information, most due diligence investigations collect data through the targets’ management but do not pay enough attention to their clients, partners, rivals, suppliers and other important channels. As mentioned above, different positions do the parties of takeover occupy. The distinction may result in subjective and one-sided judgment on the targets’ condition. Additionally, on the content, traditional due diligence investigations center on the targets’ history and present, like finance, operation, legal affairs, governance and so on. The future of the enterprise, the potential risks and challenges after the takeover are put aside however. Even if the targets perform well in financial, operational and legal stuff itself, there is still possibility that the combined enterprise will face difficulties on human resource combination, structure rearrangement and business consolidation. It was shown by an investigation into 115 M&A cases conducted by A.T. Kearneythe famous international consultant in M&A, 60% failure of M&A resulted from the restructurings after takeovers.5 In order to solve the problems mentioned above, I think present due diligence investigation should be improved from the following aspects. Above all, due diligence investigation conductors should cast doubt on the materials provided by the targets and inspect the authenticity of the information. Moreover, in the process of conducting due diligence investigations, data should be collected through the targets’ clients, partners, suppliers and other channels in addition to their management, so that the potential buyers can gain all-rounded views towards the targets. Finally, the content of due diligence investigations should not be confined to traditional considerations like corporate finance, operation and legal affairs, but should also cover analysis on the entire trade, risks and challenges which the combined enterprise may be confronted with. Due diligence investigation reports should contain evaluation of the specific takeover actions and deliver objective opinions on the deals in the long run. It is crucial for enterprises to carry out M&A, so the professional persons employed to conduct due diligence investigations should bear the fiduciary duty in offering comprehensive authentic information and objective far-sighted opinions. When referring to the present official legal literatures, we already feel much assured. The section 9 of "Directory of Broker Dealers in Conducting Due Diligence Investigations" issued by Securities Association of China lists methods of conducting due diligence investigations beyond traditional ones. Although it is still limited in its content and legal effect hierarchy, every step contributes towards the mile, at least we have seen the hope of advancement. ——————————————————————————– 1See US Securities Act of 1933, Section 11. 2See Berens & Strauch, Due Diligence bei Unternehmensakquisitionen: eine empirische Untersuchung, Peter Lang, 2002, Frankfurt am Main, S. 17 ff., quoting from XU Defeng: On Due Diligence Investigations in M&A, 5..amteam../print.aspx?id=615225 About the Author: 相关的主题文章:


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