Motivation And Economic Consequences Of High Performance Commitment In M&A Of Listed Companies

With the rapid development of M & A market,the use of performance commitment is more and more frequent in M & A transactions.In theory,performance commitments can protect the interests of small and medium-sized investors by allowing both parties to take risks,preventing valuation bubbles caused by the use of proceeds act,avoiding trade price distortions,and reducing information asymmetries.There are more and more "high commitment,high valuation and high premium" phenomena in the merger and acquisition market.In 2014,when policies remove mandatory performance commitments,what are the incentives that drive mergers and acquisitions to enter into high performance commitments?First of all,based on the interests of the shareholders of both sides of the merger and acquisition game,this paper analyzes the motivation that the major shareholders of listed companies use high performance commitments to transmit "good" news,then push up the stock price and take the opportunity to seek higher profit reduction.Target company shareholders use high performance commitments to increase valuation and merger pricing to obtain higher negotiating returns.However,for listed companies,high performance commitments will hurt their long-term performance.On the one hand,high merger and acquisition premiums mean that listed companies need to put more cash and stocks as their prices,which directly affects the performance of listed companies.On the other hand,high merger and acquisition premiums will increase the goodwill of listed companies.Once the performance commitment defaults,it will cause a significant impairment of goodwill,which will indirectly affect the long-term performance of listed companies.Secondly,taking the merger and acquisition incident of Ourpalm Co.,Ltd between2013 and 2018 as the case analysis object,we discuss the above main points of view.This paper analyzes the motivation and economic consequences of the high performance commitment signed by the two parties to the listed companies.Specifically include: First,from the analysis of stock prices,it is found that high performance commitments can lead tothe rise of stock prices.Major shareholders of listed companies often reduce their stocks at or near the highest point of stock prices.From the analysis of cumulative excess rate of return,they find that when major shareholders reduce their holdings,cumulative excess rate of return is highest,All these prove that the motivation of large shareholders of listed companies to sign high performance commitments is to obtain higher profit reduction.Second,comparing the merger overpricing rate and valuation overpricing rate of various trading schemes,it is found that signing performance commitments can allow the target company shareholders to obtain higher returns,and higher performance commitments have higher overpricing rates.Verify that the high performance commitment of the target company’s shareholders is to obtain higher negotiation revenue;Third,after analyzing the long-term performance of Ourpalm Co.,Ltd from the aspects of goodwill,financial indicators,Tobin Q,and market value,it was found that the high performance promise seriously dragged down the company’s performance after it was difficult to meet,and the goodwill of Ourpalm Co.,Ltd suffered huge losses.The profitability has seriously declined.The sharp decline in market value confirms that high performance commitments have had adverse consequences for the long-term performance of listed companies.Finally,based on theoretical analysis and case study,this paper concludes that the majority shareholders of listed companies can reduce their stock holdings and obtain excess income at the best time;Target company shareholders can profit from performance commitments;High performance promises can improve the company’s performance in the short term,but in the long run,they will drag the company’s performance.On the basis of this,it is proposed that the supervisory layer should strengthen the supervision of the major shareholder’s reduction behavior,the relevant departments should improve the enforcement of the performance compensation default situation,and the small and medium-sized investors should strengthen the prevention awareness of the risk of high performance commitment.