Analysis On The Motivation And Effect Of The Valuation Adjustment Mechanism In Equity Acquisition

Valuation Adjustment Mechanism,as a means of valuation adjustment,not only be used in private equity funds and venture capital investment,but also be widely used in equity acquisition.How to assess the value of the target company is the first step towards a deal.Valuation results tend to vary depending on the valuation method used.Income Method is the most widely used for Equity Valuation.What's more,income approach is based on future earnings expectations in accordance with established methods to calculate the value of the company.The accuracy of the results is greatly influenced by the evaluators.Since the future is difficult to fully identify the risk,the possibility of high valuation appears high.In order to protect their own interests and encourage the other party,the acquirer often need to make agreement on the future level of financial situation.If the actual performance is less than expected,the acquirer can get compensation from the other part.In securities market,the acquisition of the company's value based on the income method is usually accompanied by Valuation Adjustment Mechanism.However,the final results are not consistent with expectations.In order to analysis on the motivation and effect of the Valuation Adjustment Mechanism in equity acquisition,I chose Kunshan Jinli Co.,Ltd.which is the small and medium-sized board listed company as an example.The Kunshan Jinli Co.,Ltd.as a case has a certain representation.On the one hand,Income Method is the way to assessment the valuation of acquired companies and the result is always high valuation.On the other hand,the terms of the contract agreement is based on net profit indicators which are also common terms of the gambling agreement.Firstly,the thesis summarizes and analyzes the domestic and foreign research results on the Valuation Adjustment Mechanism.The results summarized into three categories: the basis of Valuation Adjustment Mechanism,the reason for the use of Valuation Adjustment Mechanism and the risk of Valuation Adjustment Mechanism.Based on the information asymmetry theory,incomplete contract theory,game theory and enterprise valuation theory,I find that the gambling agreement can reduce the agency cost under the condition of information asymmetry.But,we also need to pay attention to the pressure given by the terms of the agreements.It may result in the loss if the management chose to take short-term opportunist behaviors to the enterprise in order to meet the performance commitment.How to do a good job of the balance between the advantages and disadvantages is a question worth pondering.Considering of the law of our country has not yet clearly defined the nature of Valuation Adjustment Mechanism,we need to know that the legal environment in practice is an important factor that cannot be ignored.Then,the paper explains the case is focused on the content of the design and the characteristics of the acquisition.The case analysis of Kunshan Jinli Co.,Ltd.starts with the motivation.The company attempted to meet the practical requirements and gain the expected benefits by using Valuation Adjustment Mechanism.First of all,the valuation method is easy to be affected by a series of assumptions and subjective judgments.So,the result is difficult to fulfill fair.Acquirer need to find a way to adjust the valuation in case of the price the acquirer pay is greater than the fair price.Valuation Adjustment Mechanism is a good choice.Secondly,the signing of Valuation Adjustment Mechanism can reduce agency costs and the announcement which containing the provisions of the terms of the gambling agreement will pass message to the market that the acquisition is guaranteed and stimulate the stock price.In addition,the paper analyzes corporate performance and the cost and benefit of the parties on the basis of the results of the negotiation.Comparing the results with the expected results,I tried to analyze the reasons of difference correctly and come to rational conclusions.From the analysis of Kunshan Jinli Co.,Ltd.case,the paper draws the following conclusions:(1)Profit requirements too short-sighted,market risk is too large to offset the incentive effect.(2)Large sums of money invested in the acquisition of the project,spread risk is not enough.(3)Merger process which is too long is not conducive to the shareholders during the agreement right.(4)The division of control and management responsibility is not clear,which can lead to opportunism.(5)The legal risk and cost recovery effect of Valuation Adjustment Mechanism.On these basics,the paper proposed five recommendations:(1)Concerned about the investigation and supervision of the acquired firm.(2)Terms of the agreement refer to the Balanced Scorecard,taking into account the diversity and flexibility.(3)Under the feasible conditions of the acquisition of shares to be issued,depending on the performance of the agreement to pay installments.(4)Expert advice on the legal effect of the agreement to reduce legal risks and rights safeguarding costs.(5)Establish an agreement to sign a specific control and accountability system.