Analysis On The Risk And Prevention Measures Of Performance Commitment In Corporate Mergers And Acquisitions

At present,China’s economic growth is slowing down and the intensity of competition in the domestic market is increasing rather than decreasing.Under such circumstances,some companies are beginning to realize the importance of obtaining more resources and market share through mergers and acquisitions.In order to enhance their competitive edge,promote industrial upgrading and achieve effective expansion in their target markets,many companies have turned their attention to M&A and restructuring in the hope of achieving industrial expansion and enhancing their innovation capabilities.In this context,M&A has become an important means for many domestic companies to enhance their core strengths and seek new development paths.All in all,the domestic capital market is very active in M&A activity,with the number of deals and the size of transactions increasing significantly.Listed companies choose M&A because a successful M&A transaction can effectively reduce a company’s management costs,solve its financial dilemma,and ultimately improve its overall strength and enable it to reach new and higher levels of profitability in its future operations.Therefore,in order to achieve higher profits a company must integrate and improve its strength through reasonable M&A behavior,thus achieving the desired purpose.However,with the increase in the number of M&A cases in the domestic capital market,the various risks associated with M&A have come to the fore.When problems such as post-merger performance failures cannot be properly resolved,the M&A parties often resort to "performance commitment" to solve the problem.As a result,performance commitment,a contractual system for reducing M&A risk,has gained many advantages and is now being used by more listed companies in M&A activities.The original purpose of performance commitment is to prevent and control the risks associated with M&A,to make valuation adjustments in M&A and to protect the interests of listed companies.In M&A activities,performance commitment not only provides a price space for M&A parties to negotiate and evaluate,but also enables M&A parties to forecast and estimate future operating performance through performance compensation provisions,thereby reducing M&A costs.As a special accounting treatment,performance commitment has an important impact in the capital market by enabling more effective communication between M&A parties in terms of information disclosure.In China,performance commitment is a relatively mature and frequently used institutional arrangement.However,the use of performance commitment by companies has gradually defeated the purpose for which the system was originally set up,and the high premiums generated by performance commitments have become one of the key targets that both parties to M&A transactions are competing for.In a sense,performance commitment has become a tool to raise share prices and premiums in the capital market,and the orderly development of the domestic capital market has been seriously disrupted.Therefore,how to avoid the risk of performance commitment is one of the focal issues that both parties to M&A transactions are currently concerned about.On this basis,this paper firstly compares the relevant literature on performance commitments and their risks at home and abroad.Secondly,the case of Philisense’s successive mergers and acquisitions of six enterprises by means of performance commitment is taken as the object of study.From the perspective of the M&A parties,the performance commitment period is used as the criterion for risk classification and collation,and the risks at three time stages before the performance commitment period,during the performance commitment period and after the performance commitment period are identified,including the risks of overvaluation of the underlying assets,single performance indicator setting,performance change and legal enforcement.Finally,on this basis,a performance commitment risk prevention system is built to help companies prevent risks arising from performance commitments from multiple perspectives,from optimising the terms of the agreement to strengthening supervision.This will enable M&A firms to have a certain understanding of the performance commitment system and its risks before the start of M&A activities,and to use the risk prevention proposals put forward in this paper as a reference when they encounter similar problems.The highlights of this paper are mainly in two aspects: firstly,it chooses Philisense,which has had several M&A activities within a relatively short period of time,as the subject of the case study,which breaks away from the thinking that most case studies only focus on one M&A event,and can better corroborate the conclusions in terms of time and quantity;secondly,it studies the transmission mechanism between corporate performance commitment risk and financial risk.However,there are shortcomings in the analysis of this paper,as it fails to analyze performance commitment risk from the perspective of participants other than the M&A parties,and there is a lack of thorough consideration of risk factors,so further in-depth research is needed.