On Unfulfilled Performance Commitment Problem Of Acquisition

As premium mergers and acquisitions gradually become the norm in the Chinese market,China's unique performance commitment compensation system has gradually taken shape.The introduction of the system is mainly for M&A transactions that acquired companies are assessed by the income method.According to the system,the acquired companies are required to make performance commitments on the profitability of their companies and sign compensation agreements with the acquisition companies,which aims to prevent the undervaluation of the acquired companies.However,more and more aggressive performance commitments have been made over time,due to acquired parties want to obtain higher valuations and transaction premiums.But after the M&A transactions,there have been more unfulfilled performance commitment problems.The problem includes two phenomena: One is that the performance of the acquired party begins to deteriorate and ends up with failing to reach the target during the commitment period;the other is that although the performance of the acquired party reaches to the target during the commitment period,it begins to significantly deteriorate after the period.Both of these phenomena will cause serious damage to the acquisition company and its owners.To this end,it is necessary to do the research on the unfulfilled performance commitment problem.Moreover,there are relatively few domestic and foreign literature on this field.Therefore,based on transaction cost theory,principle-agent theory,hubris theory,real options,asymmetric information theory and signal transmission theory,this paper selects SHINVA's acquisition of CHENGDU YINGDE bio-medical equipment technology limited corporation as the research case.Firstly,it introduces the case overview,valuation premium,performance commitment and compensation plan.Then the paper analyzes the causes of the acquired company failing to reach its performance commitments.Secondly,it analyzes the market reaction and financial performance of SHINVA after acquisition and reports the progress of the compensation.Then relative proposals have been put forward based on the above analysis.It is believed that three reasons are responsible for unfulfilled performance commitment problem of the acquired company: Firstly,the valuation of the acquired company has a large risk level.The evaluation agency used the income method and the profit forecast of the acquired company was too optimistic.Secondly,the managers of SHINVA are blindly optimistic about the acquisition and there is a serious information asymmetry in the review process.Comprehensively,the M&A plan was still adopted under the review.Thirdly,the integration effect of the acquisition has not reached expectations.The macroeconomic downturn and the change of industry policy have had a significant impact on the performance of the acquired company.Moreover,its attempt to change the main business fails to open up new product markets,and the cost and expense are higher than forecast.The above three reasons have led to a huge reverse of the acquired company's performance to the performance commitment,which ultimately dragged down the performance of SHINVA.Therefore,the author believes that today's performance commitment compensation system lacks rigid constraints.It is difficult to prevent the undervaluation of the acquired company caused by income method.It must be rectified from the following six aspects: changing asset assessment methods,improving performance commitment compensation system,enhancing the degree of information disclosure of acquired targets,strengthening supervision over performance commitments and compensation,establishing an evaluation and accountability mechanism and improve corporate governance structure.In this way,it is possible to prevent the acquired companies from putting forward unrealistic performance commitments to obtain a higher premium more effectively,which will ultimately lead to reduce unfulfilled performance commitment problems.