Research On Prevention Of Goodwill Impairment Risk By Performance Commitment In M&A Of High Premium

With the changes in the economic environment and the development of the capital market,M&A(Mergers and Acquisitions)take much more important pisition in the expansion and transformation of enterprises.The number and scale of M&A have increased year by year,and premium have frequently appeared in M&A activities.Due to the asymmetry of information and other factors,risks of M&A often outbreak.Among them,the great goodwill brought by great premium payments has created a huge risk of goodwill impairment for enterprises.In order to prevent M&A risks and protect the interests of investors,more and more companies choose to sign performance commitments.At the same time,the failure of performance commitments has occurred repeatedly.Especially since 2017,a large number of enterprises have disclosed that performance of their target corporates didn't meet goals of commitments,which caused them to withdraw huge amounts of goodwill impairment,The shadow of the risk of goodwill impairment has cast over more and more M&A enterprises.In this context,the industry of the LED display application is also facing internal and external problems.Integration and M&A among enterprises have become common in recent years.Due to the support of national policies in previous years,lower entry barriers and larger industry space,it has attracted a large number of investors to enter the industry.The size of industry market has grown rapidly.However,in recent years,competition within the industry has intensified,and contradictions such as overcapacity and price wars have become increasingly prominent.Coupled with the impact of the macroeconomic downturn,the industry's profitability has begun to decline.Large companies in the industry intent to expand their scale,extend the industrial chain,achieve synergy,and increase corporate value through M&A.As a leader in the industry of LED display application,Lian Tronics has carried out a lot of premium mergers and acquisitions since 2013.Performance commitments has been formulated in each M&A transaction.As a number of performance commitments failed to meet the requirments,it had to accrue large amounts of goodwill impairment provisions,which not only caused a negative impact on its profits,but also seriously affected company value and company image.This thesis selects the case of Lian Tronics' s mergers and acquisitions of Fenshi Media.The particularity of this M&A transaction is that the target company Fenshi inflated operating revenue and profits during the commitment period and was punished by regulatory agencies.And it also forced Lian Tronics to restate profitability,which led the performance to trasform from meeting targets to failure.Therefore,Lian Tronics accrued large amounts of goodwill impairment provisions This thesis uses the methods of literature analysis and case studies.It introduces the basic situation of the both parties of the M&A,and summarizes the process of the M&A,including value evaluation and appreciation,payment,design and completion of the performance commitment,impairment of goodwill and subsequent execution of performance compensation.On this basis,it explores the causes of goodwill impairment risk.At the same time,it discusses the reasons for the failure of the performance commitment to effectively prevent the risk of goodwill impairment.Then,suggestions are put forward from three aspects which are before,during,and after the performance commitment signed.According to the study,this thesis hopes that the performance commitment can be used as a means to prevent the risk of goodwill impairment as much as possible.In the meantime,It provides other enterprises with some useful lessons.