A Case Study On The Valuation Adjustment Mechanism Between Mengniu And Private Equity Funds

The valuation adjustment mechanism is the valuation of enterprises conducted a post-adjustment mechanism.Setting up valuation adjustment clauses in private equity financing is a way for investors to reduce investment risks.The valuation adjustment agreement is a very important part of the entire investment contract.In practice,the invested company often achieves multiple rounds of investment demand by signing valuation adjustment agreements with private equity investors before it is listed.In this paper,Mengniu bet on Morgan Stanley and other private investment institutions as an example to study the profound reasons for the Valuation Adjustment Mechanism using asymmetry information theory,principal-agent theory,incomplete contracting theory,incentive theory.It is precisely because the parties to the transaction have taken into account the uncertainties of future transactions when determining the transaction relationship,and therefore stipulate that the rights and obligations of both parties to the transaction should be fulfilled after the adjustment of the performance of the company in a certain period of time to be completed in the future,and the information asymmetry is resolved.The resulting moral hazard issue,at the same time,is actually a high-risk,high-yield equity incentive for valuation adjustment mechanism,motivating the investee management to fully mobilize their enthusiasm,improve business management,and achieve higher performance for the benefit of both parties.Therefore,the signing of the valuation adjustment mechanism can,to a certain extent,motivate the invested company to continuously improve the corporate governance ability and profitability.From the perspective of game theory,this paper analyzes the different effects of different game strategies of investment and financing parties,demonstrates that adopting repeated game strategies is more beneficial to the invested companies,and adopting repeated game strategies has greater probability than non-repeated game strategies.To achieve a win-win situation for both sides of the gambling,but also effectively reduce the risk of investment and financing parties.This paper deeply analyzes the cost-benefit of both sides of the stake.The costs of the investor include the search cost of the company,the cost of signing the agreement,thecost of assisting the invested company in improving its management structure,capital operating costs,and opportunity cost.The revenue includes the proceeds from the appreciation of the equity of the invested company,the compensation income as stipulated in the agreement,the equity transfer income obtained from the successful listing of the invested company,and the capital dividend income.The cost of the invested party includes the cost of signing the agreement,the cost of improving the management,and the cost of capital operation,the income of the invested party includes the invested party's use of the huge amount of funds raised by the investor to achieve rapid development of the company,gaining huge profits,and winning gambling.Equity or cash awards received from investors.This paper studies the risk of the signing of valuation adjustment mechanism between investment and financing parties.Including default risk,business risk,loss of control risk and agreement risk.It believes that the default risk of investment is greater than that of the investee,and the distribution of benefits to the valuation adjustment mechanism is based on the conditions of the investee's performance.Moreover,regardless of the outcome of the bet,the investor will receive a guaranteed bottom income.If the invested party fails in the valuation adjustment mechanism,the corresponding equity or cash obligation to pay the investor is huge,and there is even a risk of losing control.In the face of future performance target pressures,the investee may be quick to make short-term actions that will damage the long-term development of the company and seriously affect the long-term development of the company.Finally,the financier also faces risks in setting the terms of the valuation adjustment mechanism.This article discusses the legal effect of the valuation adjustment mechanism,and believes that the valuation adjustment mechanism is a special product sales contract and a derivative tool for the investor's own rights and interests.Finally,based on the research conclusions obtained,this article puts forward suggestions on the use of valuation adjustment mechanisms in private equity financing.First of all,we should rationally understand the valuation adjustment mechanism,carefully weigh the terms of the valuation adjustment mechanism,uphold objective and reasonable principles,and carefully evaluate the performance of the company in the future and other aspects.Second,the valuation adjustment mechanism should adopt arepeat game structure as much as possible.Objectively understand the various issues of the investee and the future development potential of the invested company.Third,the company should pay attention to the protection of corporate control rights when signing the valuation adjustment mechanism.Finally,the company should improve its own profit-making ability and enhance its own core competition.In the end,companies should base their efforts on the long-term development of the company,avoid short-sighted behavior and blindly expand.