Research On The Causes And Economic Consequences Of Failed Performance Promises In Corporate M&A

With the development of our country’s economy,enterprises want to quickly improve their strength,seize the industry’s development dividend period,and seize more market share in a short period of time,the initial stage of relying only on their own ability to explore and seek development opportunities will obviously expand the time span,increase a large number of costs,and increase the risk of future failure,and mergers and acquisitions can well reduce this risk,so a large number of enterprises choose to cooperate with enterprises with certain development experience.However,as the parties to an M&A do not fully understand and trust each other’s business information,the emergence of performance undertakings has attracted significant attention in order to facilitate a smooth M&A process and protect the interests of both parties.In recent years,China has paid further attention to the problem of environmental pollution,and the state has advocated the protection of the environment for all people while also starting with policies to vigorously encourage the development and use of new energy,promote the development of enterprises with subsidies,reduce the pressure on the survival of enterprises in the industry,encourage innovation and promote construction.As a result,more and more capital is flowing into the PV industry,and some enterprises that originally relied on traditional industries for profit are actively transforming to improve their ability to withstand risks.However,this paper finds that companies should not rely excessively on the binding nature of performance commitments.If they want to develop in an industry,or if they want to gain the support of an Acquired party to create value for themselves,they need to assess the industry’s development prospects comprehensively and choose a suitable target company carefully,otherwise if the performance commitment fails,it is often very difficult for the Acquired party to obtain performance compensation or to recover the capital invested if the Acquired party’s operating conditions deteriorate and it is already very difficult to maintain its own development,or worse,it may affect its own operating performance.Current domestic research on performance promise failure in M&A focuses on the rationality of the performance promise itself,mainly on the promise of high valuation and high performance,while less research has been conducted on the irrationality of the behavior of the M&A party.The paper takes the perspective of the M&A party and examines the economic consequences of failed performance commitments for the M&A party and how to prevent and respond to them in a timely manner,which is more relevant for the M&A party to prevent failed performance commitments.The case chosen is a typical one.The M&A party,Hailu Heavy Industry Co.,Ltd,was a strong boiler waste heat industry player with a high market share and a strong economy,but the M&A was intended to develop more businesses to improve its competitiveness,but ended in failure due to a failed performance commitment.This paper selects Hailu Heavy Industry Co.,Ltd’s acquisition of Ningxia Jiangnan Integrated Technology Co.Ltd.The data was analyzed and it was found that Jiangnan Integrated’s operating results continued to plummet during the performance commitment period,resulting in the failure of this performance commitment,which in turn led to a significant reduction in Hailu Heavy Industries’ profitability,solvency and development capacity,and at the same time,Hailu Heavy Industries was deeply involved in litigation disputes and reputation damage due to the guarantee given to Jiangnan Integrated and the recovery of accounts receivable from Jiangnan Integrated.Then,the analysis of the reasons for the failure of performance pledges reveals that it is mainly due to Hailu Heavy Industries’ over-optimistic view of industry policies at the beginning of the M&A,insufficient risk awareness,overestimation of the ability of the acquired party,and deficiencies in its management at a later stage.Through the study of this paper,the M&A parties put forward relevant suggestions to prevent and control the failure of performance commitment: Firstly,carefully select the subject industry,assess the development of the industry,and carefully select the subject company;Secondly,the performance commitment period does not rely on the performance commitment agreement,actively monitor the management of the subject company to bring into play the synergy effect;Thirdly,after the end of the performance commitment period,if the performance commitment is met,continue to pay attention to the operating dynamics of the M&A party,to prevent the "mine",and if the commitment fails,you should use legal means to protect your rights and interests and reduce losses.The case studies in this paper aim to improve the probability of successful performance commitments in M&A and promote the healthy development of the capital market.