| With the impressive development of economic globalization and informationization, mergers and acquisitions(M&A) form an indispensable part of the historical process. More and more companies show their interest in M&A deals to expand the scale of the enterprise rapidly, to strengthen the control of the market and to improve the value of the enterprise. However, besides benefits, there also remain risks. For instance, the very features of M&A deals will lead to risks. As a result, a wealth of companies are engaged in a bitter struggle in M&A and many failures occur. In response to the challenges, performance compensation system is created in order to maintain fair trade, to ensure the quality of the underlying asset, to protect the interests of investors and to prevent and control the risks. Performance compensation system was introduced to China in 2005 and was first implemented by the listed companies in the reform of non-tradable shares. Since the Chinese economy has been growing and a load of M&A have been reached, compensation agreements have been more widely adopted by many companies and have been developing rapidly in Chinese capital market, with the advantages of effectively correcting the valuation premium rate, preventing and controlling the trading risk and motivating managers. But compensation agreements bring risks to enterprises while preventing and controlling the trading risk. Performance compensations can mainly be classified into two types: stock-based compensation and cash-based compensation. Different types of compensations will lead to different results as varied compensations will exert different influences upon both sides of the M&A, have different effects in terms of constraints and incentives and then bring about different trading risks. Meanwhile those risk elements will affect M&A conformity and the performance of M&A. The article analyzes the different performance compensations. By analyzing the cases of Blue-Focus merging with KINGO and SNK respectively, it will draw comparisons between stock-based compensation and cash-based compensation. And then it will investigate the different effects on the performance of M&A caused by different types of performance compensations, based on which it will provide strategical suggestions for the enterprises concerning how to choose suitable types of performance compensations and make the most of the compensation agreements.The article finds that stock-based compensation and cash-based compensation bring about different risks. It analyzes the risk effect in three aspects, namely managerial myopia risk, valuation risk and objective setting risk. First, in terms of managerial myopia risk, stock-based compensation shows higher effect risk because under which the promisors will lose management rights if they fail to meet performance commitments. Faced with such heavy pressure, the enterprise may behave short-sightedly in order to accomplish the promised profits. Second, in terms of valuation risk, stock-based compensation tends to cause higher valuation premium rate and higher effect risk. Third, in terms of objective setting risk, cash-based compensation will lead to higher objective setting risk since the relatively low constraint and incentive effect will urge enterprises to set relatively high performance goals, which as a result will increase objective setting risk. Based on the case studies, the article verifies the theoretical analysis.Based on the analysis of risks and two M&A cases related to Blue-Focus, the article conducts research on different compensations’influences upon the performance of M&A. It concludes that stock-based compensation will lead to higher managerial myopia risk and valuation risk. In order to accomplish the forecasted profits, the enterprise tends to pursue significant growth in a short time at the expense of the long-term benefits. At the same time, accompanied with the heavy financial burden of the enterprise, the performance of M&A will be weakened. In the case of Blue-Focus merging with KINGO, Blue-Focus adopts stock-based compensation. But the performance of M&A is poor as the profitability, the operational capacity and the solvency of KINGO all decline during the commitment period. In addition to that, Blue-Focus conducts cash-based compensation in the M&A case of SNK. As a result, the profitability and operational capacity of SNK are steadily improved, the financial burden is eased and the solvency of the enterprise is developed. However, the cash-based compensation tends to arise objective setting risk, which leads to the blind expansion of the enterprise and does harm to the M&A performance. At the early stage of M&A, rather high performance goals are set, which brings about high risks and causes the poor performance of M&A. |
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