The Research Of The Practical Application Of VAM

Valuation Adjustment Mechanism (VAM, for short), considering the uncertainty of the enterprise future profitability, It is an agreement made by the private equity capital and the financing enterprises when the PE want to invest in the enterprises. Usually, VAM will give a certain index and performance is the most common one. What's more, IPO and technology inventions are also used as a target. If the financing enterprise achieves the target, the PE will give some bonus to the corporate management, and vice versa. Investors use the agreement to safeguard their own interests, and effectively stimulate enterprise management as well.Since 2004, when Mengniu Dairy is successful listing by VAM, the agreement began to be widely mentioned in China. It is reported that VAM exists in more than 70% of the venture capital agreements in our country recently. But when it occurs to the result, the truth is sad, because the domestic enterprises always win less on the road. The enterprises which win will have a qualitative improvement, but the rest will suffer a lot, sometimes they even lose all they have. In China, many enterprises objectively need the help from private equity for financing, so the VAM exists objectively as well. This article is written based on this background and hopes to analyze the experience and lessons of the success and failure on the VAM, based on the real private equity financing cases. After the analysis about lessons of the real case, this paper wants to provide some corresponding countermeasures and Suggestions to the later financing enterprises.The current domestic and international research on the VAM are few, even in its birthplace & America, where the use of VAM has been relatively mature, It is still hard to find the specific research for VAM, instead, the research on VAM is accompanied with the research of private equity. However, in our country, as there is no clear legal definition about the VAM, in the aspect of law, VAM belongs to the research frontier, so VAM research in China mostly is the study of the legal aspects. Besides the lack of legal status, China Securities Regulatory Bureau banned the VAM from appearing in the IPOs. In view of the above reason, VAM is a kind of security file, It is difficult to obtain the relevant data, So the empirical analysis is difficult to promote as well. At the present VAM-related studies in economics are mostly individual case analyses, especially the classic cases. Generally, the idea of this kind of case analysis select one or two typical cases at first, and then study the VAM on the extended experience in general, finally provide some advice for the rest of the financing enterprises. In this paper, the analysis used same mode generally. What's different, this article adopted two different cases for comparison and analysis, The creative thinking is the stage-by-stage comparison. According to the operation procedure of VAM, this paper compare three stages of the two cases respectively, including signed before, during and after. Ultimately the corresponding countermeasures and suggestions are given. The general case analysis always gives some fragmented analysis conclusion, but this paper wants to give a complete countermeasures and proposals with accurate logic.In this paper, the research principle is the combination of theory and practice. In the theory part, this paper study VAM of its definition, components, characteristics, existing theoretical basis and the present research review as well. In this way we can get a clear understanding of VAM on the academic point of view. In the practice part, the first is to study the current domestic development of VAM, combined with the situation of the foreign, so that this paper can sum up the characteristics of VAM in China. Besides, this article, through detailed comparison analysis of the actual case, concludes the experience and lessons of success and failure. All above, the paper gives the enterprises some profound suggestions so that they can use VAM properly when they need financial help from private equity.This article takes the form of case analysis to analyze the VAM practice problem in private equity financing in our country, the selected case of success is Mengniu dairy with three private equity firms such as Morgan Stanley, and the selected case of failure is Taizinai Dairy with another three private equity firms such as Goldman. There are two main reasons why this paper chooses these two cases. First, the Mengniu Dairy is widely accepted as the first successful case of VAM in our country, so Mengniu Dairy is not only an example of success but also a pioneer, As for Taizinai Dairy, Morgan Stanley (Mengniu Dairy's main investor) choose it as the second dairy processing enterprise. However, the company failed and suffered a lot from the VAM, its founder lost the control of the company, so, as the failed case, Taizinai Dairy is classic. Second, there are many similarities of Mengniu Dairy and Taizinai Dairy. Comparing the two companies can give us a deeper understanding of VAM. This is because the two companies belong to the same industry. What's more the private equities are similar too. In fact, in the beginning of Taizinai Dairy accept private investment, it has been predicted as "the next Mengniu". But the similar start lead to the exact opposite end. Comparing these two companies can eliminate the interference of the industry, the foreign party; the study can be focused on VAM itself. This is the main reason why this article chooses Mengniu and Taizinai to compare.The basic mentality of the case analysis of this paper are from the signing of the agreement process, this article research what Mengniu and Taizinai encountered and how they solved the problem in every stage of the VAM. So we can find the reasons why they success or fail from the initial beginning. Finally we can sum up the lessons of success and failure. Case analysis aims to give the rest enterprise, which want to finance from PE, some profound countermeasures and suggestions in the future. When it comes to the suggestion part, we use the same logic. Before the VAM agreement has been signed, VAM agreement is signed and after, we put forward the corresponding countermeasures and suggestions to the financing enterprises in the three stages respectively. Thus we can get complete and systematic countermeasures logically, which is the most innovative part of this paper.In this paper, the choice of cases is also innovative. Mengniu Dairy and Taizinai Dairy were respectively mentioned in the literature as classic cases. But so far there has never been any documents comparatively mentioned these two cases. This paper will compare the two cases of 360-degree, so that we can increase some new point of the related analysis.The main shortage of this paper is that we didn't get enough data about Taizinai; this is because the VAM agreement itself is a confidential document, especially when the enterprise is failed. Their characteristics of short period of existence, small size and non-outstanding performance make these companies fail to meet the listing requirements of the main board market, they don't have prospectus as well, so we can't get the detailed data on VAM, As for the company's financial information, because the company didn't go public, we can't obtain the data as well.