Study On The Pricing Of MBO In China

MBO indicates members of incumbent management team acquiring significant equity as individuals with institutional support in order to control the company and obtain expected prospective return, after that the corporate equity and capital structure is changed. As an innovative enterprise M&A technique, MBO has been widely applied in western countries, since it can effectively lower agent cost of enterprises, clarify the property right of enterprise, stimulate enthusiasm of enterprise management level and internal personnel, and improve enterprise operation state. With the setting-up and perfection of the socialist market economic system in China, MBO has become one of the most important methods of state-owned enterprise reform. Meanwhile, with the implement of MBO many problems arise, such as operation in the dark, too low price and loss of station-owned assets, which has caused extensive attention and nationwide dispute. Pricing of MBO is the focus among all the problems.This paper focuses on the pricing of MBO in current China. According to the disadvantages of traditional theory and enterprise evaluation methods, an all-around and profound study about the pricing of MBO is carried out, based on the theory of real-option, games, option games and the theory of traditional capital budget and so on. Meanwhile, an appropriate "three steps" pricing method and pricing model for the pricing of MBO is presented, which offers a rational and logical theory and method of the pricing of MBO in current China. The study gives directions for the practice of MBO in current China and submits references for the related decision institutions.The pricing of MBO is the determining procedure of the target property right.Because the target property right rests on the value of the target enterprise, the evaluation of target enterprise is the first step of the pricing of MBO. Because of the special market and economic background, the current MBO in our country has many special meanings. MBO is not only a kind of reform, but also a kind of benefit adjustment of different levels. Pricing of MBO relates with many other factors, such as management team, employee, governments and so on. All the above-related special factors must be taken into account correctively. Final transfer price can be decided through different trade methods. As different trade methods have different procedures, efficiency and achievements, it is a very important and necessary step to choise a suitable trade method in the pricing of MBO.According to the above analysis, the paper divides the whole pricing process into three steps, i.e., evaluation of target enterprise, confirmation of basic price for negotiation or bid and confirmation of final price for transfer, among which evaluation is the procedure for estimation of target enterprise's vale and the base for MBO pricing. Determining of basic price is the procedure of analysis and measurement of related special factors, which is the basis of negotiation or bid. Confirmation of final transfer price is a game procedure of the two sides and the final price is achieved in this step. After a large number of academic and positive studies, the paper establishes a suitable, rational and integrated "three steps" pricing model, which concludes evaluation of target enterprise based on real options and option games, determining model of basic price with consideration of all related special factors, property right trade method primarily based on public bidding and auction and secondarily based on negotiations.Evaluation of the target enterprise based on real options and option games.Chaper three and Chapter four are about this topic.Traditional evaluation theory andmethods cannot estimate target enterprise correctly because they neglect the value offuture development opportunity and operation flexibility. There will be many realoptions coming into being with the implement of MBO. The paper puts forward anacademic model and a whole evaluation framework of target enterprises valuation inMBO based on real option and option games theory. Both self value and investmentvalue of the corporation from different angles of seller and buyer shall be evaluated,which constitute the value range of corporation. Self value includes real assets valueand its option value. Investment value includes self value, real option value and valueof management cost thrift and strategic conformity effect. Option value can becalculated by use of compound real option model. The value of management costthrift and strategic conformity effect can be calculated through the use of improveddiscounted cash current model. The valuation method based on real option theory isthe most suitable one when there is no competition. However, there are always manycompetitions in the world. The paper applies the real option games theory to the studyof evaluation of target enterprise and investment decision of MBO and brings forwardthe whole framework of target enterprise evaluation and investment decision undercompetition state. According to academic study the paper makes a real case study.The paper estimates the value of the corporate G respectively with all methods and the results prove the academic study results and shows that the evaluation method based on real options is the most reasonable one and the competition can reduce the value of real options.Determining model of basic price with all the related special factors considered. Chaper five is about this topic. Different from other developed marketing economy countries, the current MBO in our country has many special meanings. Through academic and practical operation study, three main special factors must be taken into account in determining of basic price, i.e., compensation of management team, compensation of employee and increment and the value of control property. Compensation of management team and employee has become the most important question in MBO pricing. The paper analyses the reason of compensation of management team and employee from the history of socialist market economy system, human resource theory, incentive theory and entrepreneur theory and studies current state of compensation of management team and employee. Price of corporate control is another question which must be considered in MBO pricing. Since the controlling stockholder can get much more benefit than the ordinary stockholders and acquiring control power of the target enterprise becomes one of the most important goals of the management team, the value of corporate control shall be taken into account in MBO pricing. Therefore, the paper brings forth a determining model of basic price, which takes all the above-related special factors into account. Meanwhile, the paper shows how to make a basic price in MBO taking the corporate G as an example.Property right trade method pimarily based on public bidding and auction and secondarily based on negotiations. Chaper six and Chapter seven are about this topic.Basic price is the basis of negotiation or bid. Final transfer price can be decided through negotiation, auction, bidding in public and so on. Different methods have different procedures, efficiency and achievements. Taking game theory as main research tool, the paper establishes a medol of dynamic game of incomplete information and makes a study of pricing negotiation, which is the most primary trade method in current China. The paper also establishes a supervision game model to find key measures to protect the benefit of stockholders. Comparing with other public methods, making a price through negotiation has much more disadvantages and all the academic and practical study shows that making price through public market is more efficient and can be easily accepted. Traditional trade methods can not satisfy all the demands of property right trade of station-owned enterprise in MBO. The choice of trade method should maximize the final trade price with the satisfaction of diversiform targets of local governments and the special factors of MBO. In courrent China, property right trade method of MBO of tation-owned enterprise should pimarily based on public bidding and auction and secondarily based on negotiations: publicise the news in proterty right exchange and invite intended investers in public at first, then,select the property right trade method according to the competition situation: if there is only one intended investers or more, a public bidding should be held and if there are two bidders or more up to grade, aution should be held and the bidder with the maximum price succeed.At last, according to the above study, the paper brings forth a general "three steps" MBO pricing method and gives the general pricing model of MBO. The paper also represents six pieces of suggestion on the pricing of MBO, that is to select correct and suitable evaluation method, consider all the special factors comprehensively and exactly, build open marketing mechanism which primarily based on bid in public market and secondarily based on negotiations, strengthen supervision over MBO, perfect related law and rules and build more financing ways. Only under the circumstance of efficient market, can preferable system, better supervision and MBO pricing be more open, fair, just and acceptable.