The M&a Premium Analysis Based On Incomplete Contract Theory

Contract comes of exchange behavior. Contract is a promise for a specific economic behavior which made by two or more entities in order to improve their economic situation. It should guarantee the entities'autonomy and equality, and meanwhile restrict the business rules.Based on whether the contract is complete, we can distribute contract into complete contract and incomplete contract. In real life, there are always bounded rationality, intangible words, cooperative preference and information asymmetry these unsure factors. They can lead to incomplete contract.M&A stands for"Merger"and"Acquisition". Merger is that two or more companies combine into one corporate. Acquisition is that one company uses currency, bones or stocks to buy another company's assets or stocks in the capital market, and then controls this company or this company's some assets.M&A premium, in amount, is the part of the payment off the fair value of the target company; in nature, is the expectation of synergistic effect after the deal. Then, we can see the contract nature of M&A premium. First, it has two entities, buying company and target company. Second, the price is the consequence of negotiation, accorded with autonomy and equality in contract's definition. Third, it will have an official contract to restrict both sides'obligations and rights, accorded with contract's nature. So, the M&A deal is a bunch of contracts, while the premium is the key contract amongst M&A. The process of confirming the premium is one process of setting down a contract.Before the M&A, management should estimate whether this deal can get synergistic effect or the potential investment revenue. They should make sure the prospective income, which is too hard to do. Because the premium contract is incomplete.In Chinese market, recent years, there are some new policies and developments, which make M&A has some unique incomplete factors, especially the foreign capital M&A. They have more experience in M&A and capital market. So, foreign capital M&A incomplete contracts have some unique causes of formation.For the causes of incomplete contract, we can make some improvements. About the bounded rationality, macroscopical environment, international and domestic market, politics environment and social environment are the important factors needed concerning. About the cooperative preference, on the one hand, it needs consummating the law environment of M&A; on the other hand, it needs expanding the business range of the middle organization, such as investment bank or accountant firm. About the information asymmetry, we should enforce the enclosure system and the default cost of M&A.This disquisition put forward a direction of solution: First, clear about every synergistic effect, V1,V2,……Vn; the present value is:Second, clear about the probable loss in the future for the unsure factors S1,S2……Sn; make sure every factor's probability ?1,?2……?n. So the present value is:The creations of this disquisition are: 1. Study the M&A premium at the view of contract; 2. Explain the main reasons why the premium cannot be carry out after M&A; 3. In order to improve the successful rate of M&A, I studied the way of improving the premium contract through the incomplete contract melioration.