Corporate mergers and acquisitions seem to be a feast of capital, but in fact they are a battlefield with hidden mysteries. In order to expand their territory, many listed companies are keen on horizontal mergers and acquisitions, that is, acquiring companies in the same industry or similar businesses in order to achieve rapid growth in market share.
However, acquisitions that seem to be "1+1>2" often end up being "a waste of effort" due to various financial traps. Today, Goheal will take you to explore in depth the classic cases that have pitted companies and reveal how to avoid these fatal merger and acquisition traps.
Financial fraud: It seems to be "a mountain of gold and silver", but it is actually "a castle in the air"
The primary goal of horizontal mergers and acquisitions is business expansion, but if the acquired company commits financial fraud, the listed company will not only fail to obtain the expected benefits, but may also face huge losses.
For example, the case of Ningbo Dongli's acquisition of Nianfu Supply Chain is a textbook-level "stepping on thunder". In this transaction, Nianfu Supply Chain beautified financial data by means of fictitious contracts, inflated revenue and profits, etc., so that Ningbo Dongli found that the loss after the merger was far greater than expected, resulting in a significant impairment of goodwill. Similarly, when Tianshan Biological acquired Elephant Advertising, it also falsified financial data, which eventually put a heavy burden on the listed company.
How to avoid pitfalls?
1. Due diligence cannot be omitted: Financial fraud is often hidden under complex accounts, and companies must conduct in-depth financial due diligence before mergers and acquisitions. In particular, key indicators such as revenue recognition, cost accounting, and debt status should be strictly reviewed to prevent being deceived by false data.
2. Performance betting + compensation mechanism: Through the Earn-out (performance commitment) clause, the target company is required to achieve specific profit targets in the next few years. If it fails to meet the target, the original shareholders will compensate. For example, Goheal often recommends that companies set up cash compensation or equity repurchase clauses in M&A projects to reduce risks.
3. Third-party audit agency intervention: Cooperate with independent audit agencies to conduct a comprehensive assessment of the target company's historical financial statements, business contracts, accounts receivable, etc. to avoid being confused by whitewashed financial statements.
Blind cross-border: Seemingly "diversified layout", but actually "going in the opposite direction"
The core of horizontal mergers and acquisitions is business synergy, but some companies have turned mergers and acquisitions into a "blind cross-border" game, which ultimately leads to management out of control and business integration failure. For example, the case of a listed company A acquiring new energy company B is a typical "want to expand territory, but ended up losing both the wife and the army". After the merger, the main customer of Company B went bankrupt due to a debt crisis, causing Company A's performance to plummet and eventually fall into the quagmire of goodwill impairment. Similarly, after a cross-border merger and acquisition, Company L found that it could not control the management team of the target company, and ultimately could only sell its equity at a low price in exchange for a mess.
How to avoid pitfalls?
1. Clarify strategic synergy: The premise of horizontal mergers and acquisitions is business complementarity, not blind expansion. For example, when coaching corporate mergers and acquisitions, Goheal emphasizes whether the target company has a market, product, and customer base that matches the parent company, and avoids investing in unfamiliar industries on impulse.
2. Formulate a detailed integration plan: After the merger and acquisition, the company must quickly promote resource integration, including management structure adjustment, technology collaboration, brand reshaping, etc., to achieve synergy as soon as possible.
3. Post-merger supervision mechanism: Cross-border mergers and acquisitions are more likely to have the risk of management out of control, so an effective supervision and assessment system must be established to ensure that the acquired company can develop according to the expected goals, rather than becoming a financial black hole for the parent company.
High valuation trap: unlimited book scenery, actual losses are bottomless
High valuation is often a "sweet trap" for horizontal mergers and acquisitions. In order to obtain a higher acquisition price, some target companies create "paper prosperity" by exaggerating market prospects and underestimating liabilities. Once the merger and acquisition is completed, the listed company will find that the actual income is far less than expected, and can only carry out goodwill impairment in the end.
For example, a technology company acquired a well-known Internet company and originally expected that "performance would double in the next five years". However, after the acquisition, the Internet company's revenue shrank, resulting in an impairment of the parent company's goodwill of more than 1 billion yuan, which directly lowered the stock price.
How to avoid pitfalls?
1. Valuation is prudent and rejects bubbles: Before mergers and acquisitions, companies should use multiple valuation methods for cross-validation, such as price-to-earnings ratio (P/E), price-to-book ratio (P/B), discounted cash flow (DCF), etc., to avoid overestimating the value of the target company by a single method.
2. Reasonable allocation of transaction consideration: Through the combination of equity + cash payment, avoid a one-time payment of huge cash, reduce financial pressure, and let the target company's management and listed companies "sail together".
3. Set dynamic adjustment terms: A phased payment model can be adopted to gradually pay the acquisition amount according to the target company's performance, avoiding the financial risks brought by a one-time high premium acquisition.
Conclusion: M&A is a "technical job", and avoiding pitfalls is the key
Horizontal mergers and acquisitions are not simply "buy, buy, buy", nor are they a blind capital carnival. Financial fraud, blind cross-border, high valuation traps... These potential minefields, once stepped on, will affect the company's profits at best, and even lead to a company's operating crisis at worst. Goheal has accumulated rich experience in the global M&A market, helping companies to accurately avoid pitfalls in M&A transactions and maximize capital value.
So, does your company have plans for horizontal mergers and acquisitions? Which financial traps do you think are most easily overlooked? Welcome to leave a message in the comment area to discuss, let's explore the wisdom of M&A together!
[About Goheal] Goheal is a leading investment holding company focusing on global M&A holdings. It is deeply involved in the three core business areas of listed company control acquisition, listed company M&A and restructuring, and listed company capital operation. With its deep professional strength and rich experience, it provides companies with full life cycle services from M&A to restructuring to capital operation, aiming to maximize corporate value and long-term benefit growth.
