Pricing The Corporate Control Based On The Reverse Mergers

Allocative efficiency of capital and assets is one of the core issues of finance. Mergers and acquisitions are the process of renewal in China's capital market, and also the embodiment of the efficiency of asset allocation in capital markets. Market for corporate control is an important part of the capital market, and is an important area of merger and reorganization research. The issue of control of listed companies is the core of modern corporate governance. Since 2005, the market for control has begun to enter the new stage of fast and normative development. Corporate control in the circulation times is particularly valuable, so studying the market for control of the reverse acquisition has important practical and theoretical significance.This paper will, based on transaction data of the reverse acquisition during 2007-2010, take the trading market for control related to the reverse acquisition as an entry point to research with reference to the large number of investment banking practice. I do the research gradually, firmly grasping the guiding principle that theory from practice guides practice and is subject to the test of practice. First, I analyze the basic concepts, trading subject, participants, the formation and development process of the market for control; Secondly, I analyze the procedures and types of the reverse acquisition, and the form of its control transaction; Thirdly, I build a pricing model for the control exchange transaction and make the empirical analysis; finally, I conclude based on the analysis results.The main conclusions of this paper are:(1) This paper argues that factors which promote the development of the market for control are:institutional factors, the drivers of interests, business life cycles, executive-led forces etc. During 2007-2010, the number of transactions decreased, but the average transaction volume of single transaction increased year by year; administrative atmosphere concentrates the market for control, and the marketization degree for control of listed companies is not high; among the acquisition body of control, state-owned enterprises dominate, and the proportion of private enterprises participating in the market for control is still not high.(2) There are many ways for control transaction, and the control transfer in the reverse acquisitions has four main ways:an agreement to acquire, free transfer, private placement, and merger.42.62% of the transactions obtain the control of listed companies in a single acquisition way; the use of complex methods accounts for 57.38%. Among the acquisition methods, transactions involved in an agreement to acquire account for 52.46%, transactions involved in private placement account for 63.93%. During 2007-2010, the negotiated transfer price was basically higher than the net assets per share, with an average of 3.25 times; the negotiated price was far below the market price signed for agreement, with an average 35.83% of market price; transfer price far below market price damages the interests of small investors.(3) This paper proves by the theoretical model, that the lower the price for additional shares, the more the additional number of shares, and the more advantageous the acquirer is. The pricing of the issuance of additional shares is, except for the bankruptcy reorganization, based on the average stock price of twenty trading days prior to the pricing basis day; only 18.42% of the transactions are on the premium. About 81.82% of the control transactions accompanying the assets restructuring realize value creation, and take into account the interests of other shareholders; however, the transactions of government-led control undermine the fairness and efficiency of the market.(4) The pricing ability coefficient of control transfer is averagely 0.83. In the process of control transfer, unequal status between the transaction parties makes the transaction price not reasonable and the acquirer has strong bargaining power. The marketization degree for M&A pricing mechanism is not high. From the perspective of minority shareholders, market-based pricing is better than negotiated pricing.Finally, this paper recommends to establish a national platform to match the control transactions to solve the matching problem of the reverse acquisition; to increase support for the private enterprises going public and encourage private enterprise entities to actively enter the trading market for corporate control to optimize the structure of market participants for control and encourage market-oriented acquisition approach; that relevant departments should reduce the degree of participation; to strengthen the effect that tax has on control transfer to prevent the transfer of benefits. Severely punishing insider trading can effectively improve the value of the transaction control to small and medium shareholders.The main innovation of this paper is:to fill the research field with the specific sub-market in the market for control; that the basic model and empirical analysis are both derived from the data material of the investment banking practice, while in the course of the study this paper refers to a large number of working results from investment banking practice, making the research results of this paper have more guides to practice; the model built in this paper is very practical and applicable for a wide range.