FREE online courses on Mergers & Acquisitions - Chapter 3 - What Can Go Wrong

 

Failure to perform due diligence can be disastrous. The reputation of the acquiring company can be severely damaged if an announced merger is called-off. For example, the merger between Rite Aid and Revco failed to anticipate anti-trust actions that required selling off retail stores. As a result, expected synergies could not be realized. When asked about the merger, Frank Bergonzi, Chief Financial Officer for Rite Aid remarked: "You spend a lot of money with no results."

A classic case of what can wrong is the merger between HFS Inc and CUC International. Four months after the merger was announced, it was disclosed that there were significant accounting irregularities. Upon the news, the newly formed company, Cendant, lost $ 14 billion in market value. By late 1998, Cendant's Chairman had resigned, investors had filed over 50 lawsuits, and nine of fourteen Directors for CUC had resigned. And in the year 2000, Ernst & Young was forced to settle with shareholders for $ 335 million.

 

Consequently, due diligence is absolutely essential for uncovering potential problem areas, exposing risk and liabilities, and helping to ensure that there are no surprises after the merger is announced. Unfortunately, in today's fast-paced environment, some companies decide to by pass due diligence and make an offer based on competitive intelligence and public information. This can be very risky.