Global transaction volume exceeds $3 trillion annually. According to Mergermarket during Q1 2020, global M&A activity slid down to the level of the first half of 2013. In terms of a number of transactions, the current period is comparable to Q1 2008. Let us recall that in February 2008 Bear Stearns shares were at $93 and by mid-March the insolvent company agreed to the takeover by JPMorgan at the price of $2 per share. After nearly a decade of growth, global M&A activity in Q1 2020 has decreased by 39.1% and returned to levels not seen since the first half of 2013. Total cost and quantity of transactions are comparable to similar figures of Q1 2008 ($592.3 billion and 3,744 transactions). In March 2008, Bear Stearns, a New York investment bank, went bust. That was a prelude to the international banking crisis, which ended in a bankruptcy of Lehman Brothers six months later. Then 2009 annus horribilies followed and marked the bottom of the last cycle of mergers and acquisitions. It became the only year since 2004 during which the value of transactions was less than $2 trillion ($1.71 trillion) and the total number was less than 10 000 transactions (9 963).
Nevertheless, a significant part of M&A transactions failed. Based on our experience and experience of our colleagues from all over the world, we can distinguish main reasons for such failures. Poorly performed procedure of Due Diligence stands at the top of the list.
Investors, who neglect an independent assessment of a target company or do not pay attention to expertise in a rush, suffer colossal losses.
Let me give you a famous example. In 2016, SoftBank started investing in co-working WeWork. The company was private; the high-quality due diligence was not performed. Thus, investors relied on perspectives that founding fathers stated in information and investment memorandums. SoftBank planned to invest $10 bln over three years; they had already invested $7.5 bln when it became clear that the business model of WeWork did not include any profit. It was an expansion for the sake of expansion. None of the founding fathers made long-term plans to boost profit margins.
In Ukraine, agricultural holding “Mriya” went into technical default after a surge and rapid, even aggressive, growth. Creditors of Mriya relied on company’s transparency and truthfulness of provided figures, such as high EBIDTA, revenue growth, the rapid increase of the land bank and infrastructure. They willingly invested neglecting due diligence and thorough audit.
One more version of Mriya’s default is corruption by banks that granted loans for cuts. In any case, it is obvious that the main reason of investors’ headache was the poor quality of Due Diligence. Eventually, that situation led to reconsideration of issues on financial stability assessment while attracting loans from banks.
At a recent conference of Capital Times Investment Advisory and Globalscope Partners, 91% of M&A experts named high-quality Due Diligence one of main criteria for a successful transaction. Today, however, an internal audit of a company, so-called Vendor Due Diligence (VDD), is moving up to first place. Apparently, in the future post-quarantine crisis, buyers will be very cautious and focus an investment activity around high-quality assets.