What are the risks of mergers and acquisitions?

What are the risks of mergers and acquisitions?

After M&A, there are many advantages that are beneficial to the development of enterprises, such as synergistic effect, rational allocation of resources and reduction of internal competition, but there are also a lot of risks, especially financial risks.

1. Financing risk

M&A usually needs a lot of money. If the funds are raised improperly, it will adversely affect the capital structure and financial leverage of the enterprise and increase the financial risk of the enterprise. At the same time, only by raising funds in full and on time can we ensure the smooth progress of mergers and acquisitions.

According to the different financing methods, there are two situations:

(1) Debt financing risk. Most enterprises generally make long-term loans through debt financing. However, bank credit funds mainly supplement the shortage of working capital and fixed capital of enterprises, and there is no credit project for enterprise mergers and acquisitions. So it is difficult to get the support of commercial banks. Another way of debt financing is to issue corporate bonds. Although the cost of capital is low, the raising time is long and the amount raised is limited.

(2) Equity financing risk. Issuing common stock is the basic way for enterprises to raise a large amount of funds, with no fixed interest burden and less financing risk. However, dividends should be paid from the net profit, and the capital cost is high, so you can't enjoy tax incentives.

2. False assets risk in the target enterprise value evaluation

Due to the information asymmetry between the two parties, the assets of the acquired party that the enterprise is optimistic about may be seriously overestimated or even worthless after the completion of the merger, thus causing huge economic losses to the enterprise. In the process of M&A, human subjectivity has a great influence on M&A, and M&A cannot be implemented according to the law of market value. M&A itself is a commodity exchange relationship, so it is necessary to establish an intermediary organization to serve M&A, reduce the information cost of both parties, and provide guidance and supervision for M&A's behavior.

3. Anti-takeover risk

If M&A evolves into hostile takeover, the acquired party will set up obstacles at any cost, increase the acquisition cost of the company, and may even lead to the failure of the acquisition.

4. Operational risks and risks of resettling employees of the acquired enterprise.

After the merger is completed, the enterprise may not produce synergy, the resources of both parties are difficult to complement each other, and even the scale is uneconomical, and the whole company may be dragged down. Moreover, the acquirer is often required to resettle the employees of the acquired enterprise or pay related expenses. If the company does not handle it properly, it will often bear a heavy burden and increase management costs and operating costs.

Seeing this, everyone should know what risks there are in M&A. If you want to know more about investment, please pay attention to us!