Analysis On The Motivations Of Acquirer's Performance Commitment

This article selects the performance commitment made by Western Resources in 2014 as the research object.This performance commitment lasted five years and ended as a complete failure in 2019.The case selected in this article is the acquirer's performance commitment,that is,the performance commitment is made by the acquirer,not the asset seller or the target company;and this performance commitment was made in the context of the acquisition of state-owned assets by private listed companies.There are few performance commitment cases with similar characteristics,so this article can enrich the research on performance commitment.This article defines the concepts of M&A and performance commitments,also reviews relevant research on the motivations of M&A and performance commitments.This article conducts case studies based on relevant theories,collected news,corporate announcements and other information,also combined with corporate financial indicators,stock market reaction,etc.These information was comprehensively analyzed.The background of performance commitments is very important to explore the motivations of performance commitments.Therefore,this article first explores the economic conditions of Western Resources before M&A,the operating conditions of M&A target companies,policies related to new energy vehicles and the reform policies of state-owned enterprises,then analyzes the performance of Western Resources based on the characteristics of the commitment clauses.The motivations and failure reasons of performance commitments are analyzed and summarized,and conclusions and enlightenments are drawn.After studying the terms of this performance commitment,this article found that the terms of this performance commitment cannot compensate for the weak position of Western Resources in the M&A,but will make it bear additional risks against the target asset's operating risks;compensating the target corporation's original stockholders with pure cash can enable them obtain the most direct and reliable compensation,but it will bring more pressure to Western Resources on raising funds and threaten its financial status.Through further analysis,this paper summarizes the reasons for the failure of performance commitment,including:(1)The key motivation of Western Resources' performance commitment is to use it as a catalyst in the M&A transaction.This merger is a key part of Western Resources' strategic layout,and this M&A could promote the rise of its stock prices,which is conducive to major shareholders to sell their holdings.Based on these two reasons,Western Resources has a strong desire to facilitate M&A.The seller and target corporations in this transaction are all wholly state-owned or state-owned absolute holding enterprises.Therefore,the terms of this "reverse" acquirers' performance commitment design are conducive to protect the interests of the original shareholders of the target corporations,thereby could reduce the risk of government approval failure,ultimately facilitate the transaction.(2)The seller's motivations for proposing performance promises include: First,use performance commitment as a valuation adjustment mechanism.Second,use performance commitment to lock its returns,avoid risks,and avoid future business risks of the target by defining the minimum return.Third,use performance promises to ensure the achievement of the tasks assigned by the government.Fourth,use performance commitments as a means to reduce agency costs to restrain and motivate operators.The reasons for the failure of the performance commitment include:(1)The performance commitment standard is set too high,and the acquirer has excessively optimistic expectations of the industry market,which causes its business plan to be inconsistent with the actual situation.(2)The promiser did not conduct enough due diligence and ignored the investigation of key issues.(3)The acquirer's operating capabilities are insufficient,and there is no remaining management capability to improve the efficiency of newly acquired companies.(4)The original business of the acquirer is sluggish,unable to provide cash flow support for the new business,and the new business is in a new industry,so it is difficult to produce synergy effects.(5)Unexpected changes in policies.Finally,this article draws some relevant enlightenments based on the aforementioned analysis: performance commitment standards should be reasonable;compensation clauses should be flexible;more attention should be paid to the risk of "reverse" performance commitments;management capabilities are important so do not overly dependent on performance commitments;and should continue to improve regulatory systems related to performance commitments.