Abstract
Western companies have established rigorous and robust processes to evaluate a target enterprise before its legal acquisition. This should allow the risks to be mitigated by adjusting purchase price or representations & warranties. In China, however, investors experience that conducting such M&A due diligence might be less effective. Based on neo-institutional economics, experience from corporate practice and empirical evidence, our paper explains the limitations of the approach. Our research concludes that following Western best-practice procedures does not necessarily reduce the uncertainty of an investor in China. Likewise, experts in China do not fully recognize typical M&A measures and indicators as informational substitutes (e.g. contractual terms like earn-out-agreements). Due to different cultural and institutional framework conditions, it takes further activities to overcome the asymmetric information between investor and seller.
Highlights
Despite the ongoing concerns about its economy, China remains an attractive target for foreign direct investments
To validate the statements and assumptions of this article, which are barely documented in any other scientific papers, the Professorship of International Management at Bayreuth-University has conducted an empirical survey and contacted 323 mergers & acquisitions (M&A) professionals operating in China
The established Western process of conducting M&A due diligence is less effective in China and does not significantly contribute to reducing the uncertainty of a buyer
Summary
Despite the ongoing concerns about its economy, China remains an attractive target for foreign direct investments. China is experiencing mega deals like the half billion USD acquisition of dairy Yashili by French food giant Danone [1]. This change has mainly been driven by a transforming regulatory frame-. This paper addresses the role of law and social capital in China as it might have an impact on the exchange of information in business transactions. It will help the reader understand the weaknesses inherent in the informational procedure of an M&A due diligence
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