Research On Risk And Response Of Valuation Adjustment Mechanism Applied In The M&A

In recent years, with the rapid development of China’s economy, Merger and Acquisition activity is increasing. M & A risk, particularly high risk premium, remains high because of information asymmetry. Under this background, VAM in merger came into being in use. VAM adjusts the asset value constantly according to the target company’s future operating conditions so as to make enterprise evaluation close to the real value. In 2003, Mengniu Group and Morgan Stanley with other international investment institutions signed VAM successfully which is the first one in China. Since then, a large number of domestic enterprises began to use VAM. But VAM is a "double-edged sword":on the one hand it can bring the parties a reasonable valuation of the target company to incentive management; on the other hand, VAM will put pressure on the management of the target company enabling management to take blind expansion in order to meet VAM.VAM has a significant impact on the parties to the transaction. Domestic enterprises to use VAM success rate was merely 37% and nearly seven pairs VAM fails because target enterprise performance can not reach agreement requirements or parties to the transaction early termination. VAM is not well play a role in our country. So research on what are the main risks by using the VAM in M&A and how to prevent and control the possible risk of using VAM is significant.This paper adopts case research method to analyze VAM and control problem. This article is divided into five chapters:The first chapter:Introduction. this paper introduces the basic situation of case studies, and then explains the purpose and significance. Then the relevant concepts and research status of Valuation Adjustment Mechanism are described. Then this article research ideas and research methods.Main contributions and shortcomings are elaborated.The second chapter:theoretical analysis and the status quo. First, the theory of M & A and the market situation of our country will be explained; Secondly, the nature of the VAM, theoretical foundation and trigger conditions are introduced.VAM is a kind of Aleatory contract instead of Loan Agreement or gambling. Theoretical basis includes the principal-agent theory, incomplete contract theory and real option theory. Triggering conditions include indicators of financial accounting and business development objectives. Finally we analysis VAM application status in our M & A market.The third chapter:Introducing Blue Focus Group applied VAM when mergering Kingo advertising and Sharing media from the aspect of VAM content and implementation. Then comparing the two acquisitions of similarities and differences.The fourth chapter:this paper finds out the following key risk factors of VAM by the way of theoretical analysis and case analysis:Valuation risk, Trigger condition selection risk, Enterprise development capacity insufficient risk, Corporate management optimistic estimates and blind expansion, Corporate default risk. In this basis, the two sides signed an VAM transactions must comply with the principles:Cautious, Rationality and Legality. Investors,when using the VAM,need to:(1) fully understand the macro, industry environment;(2)well due diligence;(3) reasonable valuation of the target company;(4) design reasonable trigger conditions. Financing parties need to:(1) correct understanding of the need to take M & A;(2) know well about themselves;(3) prevent dilution control;(4) enhance enterprise management capabilities and develop core competitiveness.The fifth chapter:Conclusion and outlook. This part summarizes risks and suggestions for controlling risks of using VAM and puts forward the deficiencies and possible future research directions.The main contribution of this paper:Firstly, most domestic research on VAM is from the perspective of legal or not. This paper analyzes the content of the VAM to research risks and suggestions for controlling risks of using VAM.Secondly, domestic research usually focus on a company’s success story or a series of studies of failure cases. This paper choose Blue Focus Company which mergered Kingo advertising successfully and Sharing media unsuccessfully and analyzes the content of the VAM to research risks and suggestions for controlling risks of using VAM by the way of comparing this two mergering activities.The defect of this paper is that data mainly from the announcement of the Blue Focus Company which has limitations. The VAM they signed can only reflect some special risks in the field of M&A and can’t cover all aspects of risk. This paper has not been able to quantify the risk response. But the risk response measures proposed by the author still has some significance for the current M & A market.