On The Game Between "Control" And "Out Of Control" In M & A Integration

M & A is an important means for the rapid development of enterprises, an important way to optimize the allocation of stock resources in the capital market, and a powerful force to promote economic transformation and upgrading. In recent years, the market-oriented reform of merger and reorganization continues to deepen. Many listed companies have greatly improved their fundamentals and the quality of their companies after the implementation of M & A. However, in the wave of M & A in full swing, some "sequelae" are gradually emerging, some of which are not up to standard or even out of control, and the counterparties are unable to fulfill or refuse to fulfill their performance commitments, which causes heavy losses and performance drag on listed companies. In this regard, how to better "control" the target company, so that it can provide stable, sustained and long-term performance contribution, without going to the opposite of "out of control"? Obviously, the integration after M & A has become a key link affecting the quality of M & A and even the quality of listed companies.

The intuitive impression shows that the performance commitment has become the concentrated embodiment and derivative consequence of M & A integration. Traceability performance commitment mechanism, as an important arrangement in the M & a system, is designed to clarify the compensation obligation of the asset transferor in combination with the future profit forecast of the subject matter in order to prevent adverse selection risk under the condition of asymmetric information, which also enables listed companies to have certain "control" ability for the subsequent integration of acquired assets. However, in practice, driven by huge interests, some companies and the acquiree, regardless of the actual value of the transaction object and the possibility of fulfilling the performance commitment, alienated the institutional arrangement into a "guarantee" measure for the "three high" M & a feast of overvalued value, high goodwill and high performance commitment. On the contrary, it expands the risk exposure of the "out of control" of the merger and acquisition target. This makes people fall into a kind of reflection: "control" and "out of control", where is the critical point, and how to make the balance not fall out of control?

From the point of commercial essence, performance commitment related compensation agreement is a typical civil contract, which is a legally binding agreement between listed companies and counterparties on the performance of trading targets. It makes it clear that the counterparties should have certain commitment obligations for the performance of their sales targets and protect the rights and interests of listed companies and investors. Generally speaking, it has positive significance. However, due to the underlying valuation often depends on the future growth expectation, and high performance commitment will generally enhance the market's expectation of high growth, which makes the underlying valuation highly linked with performance commitment, and the high performance commitment evolves into the booster of high premium. At the same time, high performance commitment can stimulate the stock price of listed companies, and further promote the motivation of all parties to push up the performance commitment. This seemingly "win-win" arrangement just lays a hidden danger for the subsequent performance realization and integration of M & A.

Looking back at the initial stage of M & A, most of the M & A activities seem to be able to achieve a win-win situation due to the relatively good performance of the target performance and the consistent interests of all parties involved. For example, the short-term performance of listed companies has been increased, the market value has increased steadily, and the return of shareholders is considerable. However, just as the so-called "when the tide fades, we will know who is swimming naked". When the market environment changes and the operating performance of the target company declines, the once glorious restructuring plan may meet the real test, and the seemingly flexible "control" begins to slide to the edge of "loss of control". After the "honeymoon period", the "honey" at that time tends to turn into "arsenic". In some extreme cases, after the commitment period, the performance of the acquisition target drops precipitously, the performance commitment of the trading partner is difficult to fulfill, and even maliciously evades, leading to the irretrievable results such as the target out of control. The most typical one is that the obligor refuses to fulfill the obligation of compensation. For example, if a listed company in the software and information technology service industry fails to meet the target's performance, the original shareholder of the subject refuses to make compensation, claiming that the listed company interferes with the development and operation of the subject business, manipulates the audit process artificially, and forces the original management to resign, so as to achieve the purpose of lowering the target business performance. The listed company accuses the original target shareholder of disposing assets through related party transactions and evading the industry Performance commitment. Another example is that the former shareholder of the acquisition target of a listed company in the special equipment manufacturing industry disagrees with the amount of performance compensation proposed by the listed company and appeals, resulting in the listed company has not received any compensation so far. More generally, many of the original shareholders of the acquisition target do not take the performance commitment seriously at all, and immediately pledge and cash out after obtaining the share consideration. When the compensation obligation needs to be fulfilled, however, due to one or another factors, the stock cannot be pledged and the performance commitment compensation obligation cannot be fulfilled for a long time.

In recent years, the out of control cases of merger and acquisition targets in A-share market are mostly concentrated in cultural media, medicine, games and other industries, and most of them involve cross industry mergers and acquisitions. The amount of performance commitment is often several times of the net profit of Listed Companies in that year. The risk factors such as the pursuit of "beautiful" overvalued value, high performance committed assets, blind cross-border M & A and other risk factors may be responsible. Some listed companies, whose main business was traditional manufacturing industry, followed suit to acquire hot industry targets such as games, film and television, media, etc., but due to the lack of operation experience in relevant industries, they effectively implemented the target companies in a short period of time "Control" has been very difficult, and the high performance commitment has put heavy shackles on the original shareholders and management of the target company, greatly reducing the willingness of both parties to integrate, and the precursor of "out of control" gradually appears. Some counterparties usually require the listed companies to allow the subject matter to operate independently within the commitment period on the ground of fulfilling the performance commitment, while some listed companies are more inclined to intervene in the target operation and "take over" as soon as possible. The superposition of these factors is more likely to cause the target out of control and compensation disputes. In addition, when some of the counterparties are related parties, it is easy to meet the standards accurately and in disguise. That is, when the target assets are close to the end of the commitment period, they will "step on the line" to complete the performance commitment and evade the compensation obligation by means of accounting adjustment and asset sale.

Since the scale of A-share M & A reached its peak in 2015, all kinds of risks brought by the "sequela" of M & A have gone through a certain release process. At present, the M & A of A-share market is generally in a healthy and effective development trend. Some listed companies fully enjoy the dividends brought by capital market tools based on good implementation of merger and acquisition design and follow-up integrated management and control. However, due to the continuous existence of information asymmetry and the inadequacy of the market game, the potential risks of the "three high" problem still exist. According to statistics, although the valuation of the underlying assets of A-share M & A in 2020 is still within a reasonable range, the average value-added rate of the target shows a rising trend, which is worthy of vigilance. Therefore, when the market mechanism is not perfect, it is still necessary for the regulatory authorities to effectively supervise and restrict the M & A activities, especially for the irrational cross-border restructuring and the overvalued value seriously deviating from the market logic and law. It is conducive to prevent and resolve the main risk factors that cause the target "out of control" and promote the merger and reorganization The activity returns to rationality and warns both sides of the transaction to pay more attention to the follow-up integration of reorganization.

In recent years, regulators have been trying to weaken the performance commitment orientation in the process of M & A, relax direct control, strengthen supervision, and guide M & A activities to return to rationality and origin. In March 2014, the opinions of the State Council on further optimizing the market environment for enterprise merger and reorganization mentioned that "the merger of non affiliated enterprises is no longer required to make performance commitment", and the administrative measures for major assets reorganization of listed companies also cancelled the mandatory requirements for performance compensation under the circumstances of non affiliated transactions. In addition, the system to guarantee the performance commitment is also strengthened. In March 2019, the China Securities Regulatory Commission (CSRC) issued the relevant questions and answers on the performance commitment Party's pledge of consideration shares, which made it clear that the performance commitment party should guarantee that the consideration shares should be used to fulfill the performance compensation commitment first, and should not evade the compensation obligation by pledging shares. In May of that year, the Shenzhen Stock Exchange issued the guidelines for information disclosure of listed companies No. 3 - major asset restructuring, which clearly stipulated the integrity, compliance and realizability of the content and terms of the performance compensation agreement. By strengthening the supervision of information disclosure, the performance guarantee of performance commitment was strengthened and the credit responsibility of relevant subjects was clarified.

The merger and reorganization of listed companies is the behavior of market participants' independent decision-making. The key to success lies not in the ambitious performance gambling, but in the down-to-earth integration and accommodation. From the design and implementation of M & A transactions to the follow-up management and control integration, we should take full consideration and be cautious, and we should avoid taking chances through unreasonable high performance commitments. It should be noted that in the process of M & A integration of listed companies, reasonable and appropriate performance commitment and reward and punishment arrangements not only endow listed companies with the ability to "control" the subject matter and restrict the counterparties, but also urge the managers of the M & A targets to give full play to their subjective initiative, boost the overall performance of listed companies and effectively enlarge the efficiency of M & A integration. What needs to be vigilant is that market speculators regard high performance commitments as "endorsements" of inferior assets, which makes them become the fuse of "out of control" in extreme cases.

It can be predicted that with the continuous improvement of the value discovery function of the market, the level of information asymmetry continues to decrease, the intermediary agencies give full play to the professional evaluation function, the responsibilities of the market participants are clear, the violations are severely punished, and the unrealistic and extravagant high performance commitment will eventually return to the original logic of merger and acquisition in the process of deepening the reform of the capital market 。 Since then, all parties to the transaction went to the market with light clothes. The listed companies carried out reasonable valuation and pricing and effective integrated control of the acquisition targets, and actively played the synergistic effect of the two, and continued to improve the overall long-term value, so as to make M & a really become a powerful capital market tool to improve the market function and improve the quality of listed companies.

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