Research On Earnouts Applied In M&A

In recent years, Earnouts are applied in M&A by some Chinese enterprises to bridge a valuation gap between the target and the acquirer, retain and incent target managements. This paper can puts forward some proposals on how to use Earnouts effectively through studies of theoretical and empirical.At first, this paper defines Earnouts, reveals its essence and theoretical background, analyses its benefits and risks. Basing on the above research, this paper gives a theoretical solution with Asymmetric Information theory and Option theory on how to effectively use Earnouts in the M&A. Then paper use the Blue Focus case to do empirical analysis and validate the theoretical method by its use effect.The conclusions of this paper are:The first thing is to understand the essence of Earnouts, weigh its pros and cons, decide whether to use, not too dependent on Earnouts for risk management. It will underestimate the value by ignoring Earnouts is a kind of option. It is important to reduce the adverse selection and moral hazard caused by asymmetric information problems when designing the agreement.