Research On Application Of Valuation Adjustment Mechanism And Its Risks Of Acquirer In M&A

In order to adjust the valuation bias of the target company under the situation of information asymmetry and to protect the interests of acquirer in M&A,the valuation adjustment mechanism(VAM)came into being.With the widely using of VAM in M&A as a tool to protect the interests of acquirer,the disadvantage of using VAM has also been found.As for acquirer in M&A,the purpose of using VAM is to protect the interests of acquirer by reducing the information asymmetry,incenting the target company and adjusting the valuation.But in recent years the failure rate of VAM was growing up,it is also common that performance decline after the commitment period of VAM,this has caused damage to the acquirer,which also means the VAM has not been used properly.This article attempts to explore how to control the risks and exert the function of VAM in the right direction to protect the interests of acquirer in M&A through researching on the acquirer’s application of VAM and the risks of using VAM.Firstly,the article summarizes the existing literature in related fields,and theoretically analyzes the VAM’s function of protecting acquirer in M&A and the potential risks in all aspects of adopting VAM.Secondly,combined with the institutional background of VAM in China,the dissertation analyzes the current status of the application of VAM in China’s capital market with descriptive statistics.Thirdly,by case study concerning KEDA,the article researches the acquirer’s application and risks of VAM and the related measures of risk control.This dissertation indicates that the VAM has the function of reducing information asymmetry,incenting the target company and adjusting the valuation.However,the VAM can also bring acquirer risks of overvaluation,moral hazard,insufficient control and compensation,which could be harmful to the acquirer in M&A.Under this premise,this paper puts forward some suggestions on the prevention of the risks of using VAM,such as improving due diligence,adopting diversified indicators,strengthening the supervision,enhancing the incentive effect of VAM and strengthening the control of the target company.Expected contributions of this article are as follows.Firstly,based on the positive effect of VAM,this paper analyzes the risk of using VAM,which is helpful for the acquirer in M&A to have a correct understanding of the benefits and risks of VAM.Secondly,this paper puts forward some advice in order to control the risks of adopting VAM,which can help protecting the interests of the acquirer in M&A.Moreover,this dissertation still has some deficiencies.As this paper conduct research by case study,the conclusion may not represent the overall application of VAM in M&A.Besides,due to the limited information disclosed in the case transaction,the conclusions of this dissertation may not cover all potential risks.