Research On The Application Of Profit Forecast Compensation Agreement In M&A Of The Listed Companies

Mergers and Acquisitions(M&A)are often considered as an useful strategy to help corporations optimizing the marketing resources,developing the synergistic effect,improving the management and facilitating the industrial upgrade.M&A helps the listed companies,which are aiming to expand,grow larger and stronger.However,many cases have shown that there have been harmful effects on some of the listed companies and their investors,such as with paying a premium for acquisition but the acquired company has not reached the marketable expectation of the listed company,or the major shareholders from the listed company injects inferior assets and so on.For the purpose of protecting the interest of the listed companies and their minority investors,China Securities Regulatory Commission has been implemented a regulation of ‘The Means of Major Assets Acquisition Management of Listed Company' on May 18 th of 2008.This regulation requires the listed companies to sign the agreement of profit forecast compensation if it prices the purchased assets based on the valuation of the future profit.In the process of implementing profit forecast compensation plan,it appears to have three major phenomenon,overvaluation,over profit forecasting and high performance compensation.And the listed companies often fail to accomplish the profit forecasting reports.To test whether the profit forecast compensation system could regulate the capital market and protect the interest of the listed companies has raised the concern of relevant researchers in China.Based on the cases of Cathay High-Speed Railway Technology Co.,Ltd purchasing Wuhan Leaddo Measurement and Control Technology Co.,Ltd,Beijing Jiaoda Microunion Tech.Co.,Ltd and CNFC Overseas Fishery Co.,Ltd purchasing Xiamen Xinyangzhou aquatic product industry and Trade Co.,Ltd,this article is going to focus on analyzing and studying how the profit forecast compensation agreement would protect the interest of the listed companies,and how this agreement would affect to the listed companies to gain abnormal returns.Firstly,this article will introduce Mergers and Acquisitions strategy and the profit forecast compensation agreement system.Furthermore,the article will analyze the current situation of the profit forecast compensation agreement and its influence.Finally,the article will draw the conclusion and convey the suggestions through studying the existing cases.According to the theoretical analysis and empirical studies,this article conducts the following consequences.First of all,well-established terms of the profit forecast compensation agreement not only restricts the compensation obligor to accomplish performance commitment but also assists the listed companies to retrievethecompensation.Secondly,according to both cases of Cathay High-Speed Railway Technology Co.,Ltd and CNFC Overseas Fishery Co.,Ltd,accomplishing the profit forecast compensation agreement would result in gaining an abnormal returns for the listed companies while unsuccessfully handling the profit forecast compensation agreement would lead to negative returns.Finally,the financial reports of Cathay High-Speed Railway Technology Co.,Ltd have not been improved in the short run even the target company has accomplished the profit forecast compensation agreement.Similarly,the financial health of CNFC Overseas Fishery Co.,Ltd has deteriorated due to Xiamen Xinyangzhou aquatic product industry and Trade Co.,Ltd failing to complete the performance commitment.Based on the research,this article provides suggestions for establishing and perfecting the terms of the profit forecast compensation agreement,so that the profit forecast compensation agreement would positively affect M&A and the resources of society and enterprises can be fully used to promote the capital market develop stably and healthily.To improve the terms of the profit forecast compensation agreement,this article recommends in six aspects,such as to primarily use securities for trading,to set up lock-up periods and cash installments,to choose reasonable forecast indicators,to set up compensation based on the payments of the acquisition,to set up the option of share repurchase and to set up the transaction adjustment for the acquired companies.In order to improving the profit forecast compensation agreement system.This article also suggests from four different angles: to implement bilateral bet,to introduce other evaluation indicators,to Intensify the responsibilities of intermediaries and to reinforce the supervision of the CSRC.