The Case Study Of Shenkai's Acquisition Of Hangzhou Fenghe Based On Earnout

Merging small and medium-sized enterprise with high quality is an effective way for technology companies to seize the segment market and achieve economies of scale.However,asymmetric information and future uncertainty create significant M&A risks.Accordingly,Shanghai Shenkai announced to use earnout to acquire 60% shares of Hangzhou Fenghe,a small company which specializes in logging equipment.In the acquisition agreement,the total price was based on annual net profit from 2014 to 2017 of Hangzhou Fenghe,with the ceiling of 216 million yuan,in which 60 million yuan would be paid initially,and the proportion of earnout payment was as high as 72%.However,affected by the industry decline,Hangzhou Fenghe fell short of the expected benchmark.But in April 2017 Shanghai Shenkai advanced the performance of agreement for its outreach strategy and overall profitability.The final price was 110.35 million yuan and just reached 51% of the price ceiling,while the evaluation value was 150.6 million yuan,which proves that earnout had absolutely created remarkable risk control function for Shenkai.Sourced from British and American countries,earnouts are widely used in acquisitions of targets with high uncertainty and growth property such as technological enterprises and overseas enterprises.Although in foreign countries earnout has been common and academe has conducted comprehensive study of it,domestic payment method is still too simple to meet the needs of M&A market.Because the implement of earnout in this case is very representative,this paper hopes to learn the existing research,analysis the positive and negative effects of earnouts,and discuss how to design the scheme to maximize its efficiency.Therefore,this paper carries on the thorough research to the case according to introduction,case description,case analysis and revelation.Chapter 1 introduces the topic background and meaning,research content and methods,and sums up the relative literatures.Chapter 2 introduces the whole story between Shanghai Shenkai and Hangzhou Fenghe,including their basic situation,acquisition motivation,the design and performance of payment agreement.Chapter 3 focuses on the implementation purpose and impact of earnout.This chapter lists the risks in the case to explain the importance of payment options,and compares several feasible programs to discuss the adoption reason of earnout,and study the agreement's details to analyze the positive and negative effects.Chapter 4 is to share the inspiration of this paper from the case study.