Research On The Risk And Prevention Of The Valuation Adjustment Mechanism In High Premium Merger And Acquisition In Chinese Pharmaceutical Industry

In November 2014,China securities regulatory commission promulgated the new measures for the management of major asset reorganization of listed companies,requiring listed companies to sign a profit forecast compensation agreement with the counterparty if they adopt the income method to price the acquired party.This showed that the use of the valuation adjustment mechanism has been recognized.Since 2014,the scale of mergers and acquisitions of listed companies in China and the use of the valuation adjustment mechanism have both started to grow.Active mergers and acquisitions have accumulated huge goodwill in the A-share market.Since 2014,the goodwill of A-share market has shown explosive growth,and at the same time,it also faces high risk of goodwill impairment.Because there is a strong correlation between the incomplete performance commitment and the impairment of goodwill,the accounting impairment of goodwill is often carried out by the party signing the valuation adjustment mechanism who fails to complete the performance target after the expiration of the performance commitment.Starting in 2017,a number of performance commitments expired.In 2017,the failure rate of performance commitment of A-share is 28.74%,especially the failure rate of subdivided industries such as media,medicine and computer is over 40%.In these industries,the scale of goodwill,the proportion of goodwill in total assets and the proportion of goodwill in net assets are relatively high.In the case of unfulfilled performance commitments,if a large impairment of goodwill is set aside,the net profit of these industries will decline seriously and the assets will be greatly reduced.In recent years,the scale of mergers and acquisitions in China's pharmaceutical industry has increased.The pharmaceutical industry is characterized by high technology and special asset structure,which is a typical "asset-light" industry.Therefore,the payment consideration of pharmaceutical mergers and acquisitions is usually much higher than the book value of the acquired enterprises,forming the "high premium" characteristic of pharmaceutical mergers and acquisitions.In order to reduce the risk of merger and acquisition,correct the deviation of valuation,and motivate the management,as a common risk management tool,the counterparty agreement is also more widely used in the merger and acquisition activities of pharmaceutical enterprises.However,China's pharmaceutical industry has a high failure rate of the valuation adjustment mechanism.According to statistics,the failure rate of A-share pharmaceutical industry's performance commitment in2017 was as high as 42.55%.In order to reduce the risk of using the valuation adjustment mechanism in China's pharmaceutical industry,this paper introduces the development status of China's pharmaceutical industry,describes the characteristics of mergers and acquisitions in China's pharmaceutical industry,and points out the key risks faced by pharmaceutical enterprises using valuation adjustment mechanism.Based on the case of Xinjiang Bai Hua Cun Co.,Ltd.'s acquisition of Huawe Medicine,this paper analyzes the key risk points in the case,and puts forward corresponding countermeasures and Suggestions,and draws the conclusion of this paper.The basic conclusion of this paper is that the relevant risks of the valuation adjustment mechanism run through the whole process of the application of valuation adjustment mechanism.Therefore,the prevention of relevant risks should also run through the whole process.Before signing the valuation adjustment mechanism,the two parties should pay attention to their respective resources,strength and strategic objectives,as well as the changes in the market environment and policies.In the signing of the valuation adjustment mechanism,both parties of the merger and acquisition should carry out reasonable valuation for the target of the merger and acquisition.When designing the terms of the valuation adjustment mechanism,the financial index and non-financial index should be combined.Moreover,the index should not be set too high.After the signing of the valuation adjustment mechanism,the acquirer and the acquired party should make efforts for the integration work after the acquisition,strengthening the integration of their financial,personnel,management and other aspects,and should avoid the short-term behavior of the management layer of the acquired party.