Risk Analysis Of Valuation Of Underlying Asset In Corporate M&A

In recent years,M&A activities among Chinese enterprises have been increasing.Listed companies in traditional industries want to change development models.Emerging industries are difficult to quickly enter capital market due to IPO channel issues.Based on the demands of the company’s value growth,the two parties have reached more and more M&A transactions and expect to exert synergy.However,in cross-border M&A between the traditional industry and the emerging industry,the phenomenon of high premium acquisitions is often seen,which brings hidden dangers to the acquirer’s subsequent operations.Dilong Xin Cai(Dilong),a listed company whose main business is traditional building decoration materials,acquired Meishengyuan(Mei)which is in the mobile game industry at a high price of 3.4 billion yuan in December 2015.The transaction price is 17 times higher than its valuation five months ago.After the transaction,the shareholders frequently reduced and pledged their holdings after the lift period.After the performance commitment period,Mei’s operating performance fell sharply.Dilong therefore provided a substantial impairment of goodwill and corrected the profit income during the commitment period resulted in the commitment being ultimately unfulfilled,and the transaction did not meet the expected purpose.This article uses the theory of M&A valuation,synergy effects,information asymmetry,and performance commitment related theory,combined with the above specific cases,to study and analyze the valuation risk of underlying assets in M&A.It was found that during the evaluation of the income method,the main merger party has limitations in determining the discount rate and made a prediction of the high revenue growth and high gross profit margin("Double High")of Mei in the future.The analysis believed that there was a suspicion of overreliance on historical financial information and neglect of industry risks.Combined with the results of sensitivity analysis,it is judged that the valuation risk directly stems from the above unreasonable "Double High" prediction.The reliance on endorsement of high performance commitments,together with the information disadvantages of the main merger and the joint influence the independence of the income forecast,and promote the emergence of "double high" forecast.At the same time,the existence of earnings management makes the valuation adjustment mechanism invalid.Then it analyzes the reasons why the acquirer accepts the high transaction price: operating difficulties,seeking synergy through M&A,and with the support of national policies for M&A and "Internet +",hoping to seize the opportunity for the rapid development of the game industry.In order to mitigate such valuation risks,this article proposes countermeasures: that is,to comprehensively consider various valuation methods,and make reasonable amendments to the results of the income method,at the same time,we should reasonably choose M&A strategies and prior due diligence should be emphasized.Lastly,performance commitment application system should be more perfect,strengthen business constraints,and set a more reasonable commitment indicator amount,so that the terms have the flexibility to deal with future uncertainties and achieve the purpose of "camera choice".Based on the above analysis,this article proposes three policy recommendations:(1)Need to establish a risk warning system,pay special attention to the risk identification of M&A transactions with "explosion in valuation",and take an increase in the audit threshold to question its apparently unreasonable overflow.(2)Strengthening the supervision of ex-post information disclosure,required timely disclosure of information.(3)Increase accountability processes for asset appraisal agencies,eliminate the existence of interest exchange.The research in this paper enriches the research on valuation risk analysis in corporate M&A,and it provides a useful reference for the identification and response of valuation risks in the M&A of underlying assets.At the same time,it is also expected that regulatory agencies can strengthen the supervision and management of such M&A and better protect the rights and interests of small and medium investors.