Research On The Effect Of Valuation Adjustment Mechanism On Merger And Acquisitions Performance

With the continuous development of China’s economy,more and more enterprises expand through mergers and acquisitions,so the Valuation Adjustment Mechanism(VAM)is also more and more used in M & A transactions.However,with the expiration of the term of the VAM,the failure to meet the standard broke out one after another,and lawsuits and disputes arose one after another.This phenomenon not only caused the losses in investors and listed enterprises,but also made a bad impact on the capital market in China.The study of the case of the merger of Opco and Pride Power can not only supplement the results of the case study of the VAM theoretically,it can also better supervise and manage the use of VAM in M & A transactions practically.In July 2016,Opco planned to acquire Pride Power.Because Pride Power required high premium,Opco decided to use VAM to protect their stockholders’ benefit.However,there was a huge dispute over the fulfillment of the performance commitment of Pride Power in 2018,resulting that the VAM ended in December 2019.This article takes this case as the research object and adopts the method of combining case analysis,event study and financial indicators analysis to study the enterprise performance after the application of VAM in M & A transaction.Firstly,this article introduced the study background,the study purpose,the related theories and references.Then,this article explained some theories related to VAM in M & A transaction.Next,this article analyzed the performance of Opco’s application of valuation adjustment mechanism in mergers and acquisitions transaction by using event study,financial index analysis and nonfinancial index.At last,the paper analyzes the impact of VAM on the M&A performance from three aspects.Study found that although the short-term market effect has been achieved,the incomplete performance target has a negative effect on the long-term performance of the company.Since Opco acquired Pride Power in 2016,debt-paying ability,profitability operation ability and development ability in Opco had declined evidently.Among these financial indexes,the failure to achieve commitment worsen the profitability and development ability of Opco significantly.Moreover,the failure to complete commitment may have lasting impact on Opco’s future development.The reasons of the failure are as followed.Firstly,before the merger,Pride Power was overvalued.Secondly,Pride Power had been over-dependent on the originalshareholders.Finally,after the merger Opco did not do a good job of mergers and acquisitions co-integration,and over-dependent on the establishment of unscientific bet agreement.Then,the paper analyzes the impact of VAM on the M&A performance from three aspects: the pricing of the Pride Power before the M&A transaction,the operating performance of the Pride Power in the M&A transaction,and the goodwill impairment of the Opco in the end of the M&A transaction.In the end,this paper puts forward some suggestions on how to evaluate the value of the target carefully,how to set up the content of the bet agreement reasonably and how to strengthen the business integration after the merger.