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A framework for mergers and acquisitions due diligence: lessons from selected REITs in South Africa

A research report submitted in fulfillment of the requirements for the degree of Master of Building Science in Property Development and Management to the Faculty of Engineering and the Built Environment, University of the Witwatersrand, Johannesburg, 2018 / In April 2013, the South African listed property sector converted from Property
Unit Trust and Property Loan Stock investment structures into a Real Estate
Investment Trust (REIT) structure that is understood globally. This conversion
spurred consolidations in the property market in the form of mergers and
acquisitions. Research shows that mergers and acquisitions tend to have high
failure rates as growth strategies.
It remains unknown how sufficient traditional due diligence is and how it can be
improved to enhance the chances of successful corporate marriages within the
South African REIT market. This paper reviews the aspects of the traditional due
diligence scope which generally comprises of financial, legal and commercial
due diligence in order to determine its adequacy as a decision making tool that
helps reduce the risk of failure in REIT merger and acquisition transactions in
South Africa.
There is consensus in the literature that due diligence is a means to reduce the
risk of merger and acquisition failure, some studies suggest that failure occurs
when due diligence is not done well. This paper uses interviews conducted with
due diligence professionals from seven REIT companies listed on the
Johannesburg Stock Exchange who were involved in large merger and
acquisition transactions in the preceding four years. The interviews were used to
ascertain how the professionals perform due diligence, whether or not they think
that traditional due diligence is sufficient for REIT mergers and acquisitions and
to solicit their views on how the due diligence scope can be expanded.
Transcribed data from each of the interviews was analysed based on three
concurrent sub-processes adapted from the works of Miles and Huberman
(1994) which consist of data reduction, data display and drawing and verifying
The results show that the traditional due diligence scope is not sufficient for REIT
merger and acquisition transactions, a majority of the respondents agree with
this observation. Encouragingly the professionals within the South African REIT
market have a due diligence scope which is already much wider than the

traditional scope, be that as it may, there is still a high failure rate of 59%
observed in the sample analysed.
Due diligence professionals have a low regard for understanding and resolving
the different companies cultural issues, this is cited in the literature as one of the
contributing factors for merger and acquisition failure. This is an area that can
possibly augment the due diligence cycle and professionals should focus on it in
order to improve the chances of success. The research proposes expanding the
due diligence scope by incorporating strategic due diligence which is forward
looking and it overcomes the challenges of traditional due diligence of relying on
historic information. Strategic due diligence assists the acquirers understand the
target’s future prospects, and it allows the acquirers to determine if the target
prospects fit with their own strategic objectives. This together with a higher focus
on understanding and resolving cultural issues of the merging companies should
augment the traditional scope and ultimately lead to transactions that yield higher
shareholder value. / XL2018
Date January 2018
CreatorsMabece, Yongama
Source SetsSouth African National ETD Portal
Detected LanguageEnglish
FormatOnline resource (xi, 122 leaves, 6 folded leaves of plates), application/pdf, application/pdf

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