The Case Study On The Failure Of Guangzhou Longwen's Performance Betting

With the rapid development of the domestic economy in recent years,competition among companies in the market has become more and more fierce.Enterprises cannot achieve high-speed growth based on only endogenous growth.More and more enterprises choose to expand the scale of enterprises and improve market competitiveness through mergers and acquisitions(M&A),hoping to achieve performance growth.Since 2013,the number of transactions in China's M&A market has spurted up.With the increase in M&A transactions,the risk of transactions has attracted widespread attention.In order to avoid risks in M&A transactions,companies have begun to introduce Valuation Adjustment Mechanism(VAM)in transaction activities.As an important valuation mechanism,the VAM allocates rights and obligations to the two parties through the contract,which can improve the efficiency of M&A and promote a win-win effect for both parties in the transaction.However,with the widespread application of VAM in China's M&A transactions,cases of VAM failures are common.Performance betting is the most common type of VAM.The rate of performance betting completion is directly related to gambling results.According to statistics,from2013 to 2017,the underperformance of listed companies in China has been increasing year by year,with the rate of underperformance soaring from 10.67%in 2013 to28.74%in 2017.Once the bet fails,it will bring huge losses to both parties of the transaction,especially the financiers,which may face the situation of bearing huge compensation,losing equity and even bankruptcy and liquidation.Against this background,this article takes the VAM signed between Guangzhou Longwen and Kingsun Optoelectronics as the research object,and uses a combination of theoretical analysis and case analysis to explore the reasons for the failure of the performance betting.The hope is to find out the problems in the practical application of the VAM,to provide a reference for both parties to the transaction,and then to promote the improvement of the VAM in China.The content of this article is mainly divided into the following four parts:The first part is an introduction and an overview of related theories.Firstly,introduce the research background and significance of this article,and make a literature review from the reasons for the signing of the VAM,the risk of VAM,and the reasons for the failure of VAM.Based on the review of the researchstatus,determine the research ideas and methods of this article,and build the basic framework of this article;secondly,the concept,types and characteristics of the VAM are explained,and then the reasons for the performance betting parties to sign the VAM in China's M&A transaction practice are summarized;finally,it introduces the related theories of VAM,which lays the theoretical foundation for the later analysis.The second part is the introduction of Guangzhou Longwen and Kingsun Optoelectronics' performance betting case.In this part,firstly,it introduces the basic situation of the two sides,Kingsun Optoelectronics and Guangzhou Longwen;secondly,it expounds the signing and main contents of the VAM from three aspects:the signing background of the agreement,the commitment terms of the agreement and the compensation scheme;thirdly,it analyzes the reasons for Guangzhou Longwen to sign the VAM;in the end,it introduces the result of the failure of performance betting between Guangzhou Longwen and Kingsun Optoelectronics and the losses caused to both sides of the transaction.The third part is case analysis.This part mainly analyzes the reasons for the failure of Guangzhou Longwen's performance betting from four aspects:the external macro environment,commitment terms setting,corporate operation conditions and business strategies.First of all,by analyzing the external environment of Guangzhou Longwen during the gambling period,it was found that policy changes and industry competition during the gambling period have adversely affected operating performance;secondly,it analyzes the performance setting of the VAM,and finds that there are some problems in the setting of the bet agreement,such as the high level of performance commitment,the single performance assessment standard,single-game use of the terms of the VAM,which foreshadows the failure of the performance betting;finally,it explores the reasons for the failure of performance betting from two aspects of operation and management strategy of Guangzhou Longwen during the gambling period.The results show that there are problems in the operation of Guangzhou Longwen,such as management confusion,investment plan interruption and limited profit space of main business,which affect the growth of operation performance of Guangzhou Longwen during the gambling period.The fourth part is the conclusion and implicatins of the case study.First of all,based on the analysis of the case of Guangzhou Longwen performance betting failure,the following conclusions are drawn:firstly,the change of macro factors during the gambling period affects the realization of performance;secondly,irrational settingof VAM terms sets the stage for the failure;thirdly,the cultivation of core competence is the key to achieve the goal of bet.Then,on the basis of the above conclusions,the paper puts forward the following implications:firstly,the financing party needs to objectively estimate its performance growth and avoid blind optimism;secondly,the financing party should enhance its core competitiveness and improve the management level of the enterprise;thirdly,the betting parties should pay close attention to the changes of macro factors such as market and policy;fourthly,the betting parties should reasonably set the standards and methods of the VAM.