Research On The Inhibitory Utility Of Performance Commitments To The Risk Of High-premium Mergers And Acquisitions

As China’s M&A market continues to develop and mature,the use of performance undertakings is becoming more common.Since their introduction into China,performance undertakings have been used as a valuation adjustment mechanism to help both parties to an M&A transaction to reach a fairer consideration and improve the efficiency of the M&A transaction for both parties.However,the current performance promise system in China has yet to be perfected and the market is plagued by high premium M&A and chaos.There is a mutual relationship between high valuation and high performance commitments,which inevitably lead to high valuation,and performance commitments which directly or indirectly lead to high valuation and thus high M&A premiums.The performance promises made by the subject company and the high valuation provided by the host party will mutually fuel and interact with each other,and unreasonable valuation and inflated performance promises will lay a hidden danger for M&A failure and even deepen the losses of both parties.This paper discusses how performance promises perform in high premium M&A,and whether they act as a disincentive or exacerbate the risks of high premium M&A.The paper draws on case studies to compare the performance promise provisions in different case scenarios with the existing literature,and to understand the difference between the performance promises and the performance of firms under different provisions.The value and shortcomings of performance commitments in high-priced M&A activities are clarified,and recommendations for more generalised performance commitment clauses to curb high-priced M&A risk are obtained.The paper will be based on a risk identification framework [Liu Yongjian,Zhang Xinrong.Risk analysis of Rongzhilian under the framework of performance commitment risk analysis[J].In this paper,we identify and analyze the risk of high premium M&A in the whole process of performance commitment,and analyze how the different design of performance commitment terms can be useful for high premium M&A risk.In this paper,three cases of high-priced M&A with performance commitments are selected to represent the different outcomes of different performance commitment clauses,and the risks that may arise after high-priced M&A are analysed layer by layer,taking into account the relevant domestic and international literature and theoretical analysis.Finally,a targeted analysis is conducted on the possible risk points of the M&A parties before,during and after the signing of the performance commitment and corresponding prevention suggestions are given to provide a direction for thinking about the optimal design of performance commitment and risk control of high premium M&A: if the M&A parties blindly rely on the performance commitment agreement,disregard the potential risks,such as changes in industry winds and the real capabilities of the enterprises,set in the inflated performance commitment If the M&A parties blindly rely on the performance commitment agreement,ignoring the potential risks,such as changes in industry winds and the true capability of the company,and setting unreasonable performance commitment terms,the impact of multiple factors will lead to the risk that the subject company will not be able to fulfill its promise,which will eventually lead to the failure of the M&A,damaging the interests of the listed company and investors,and also affecting the business development of the M&A party.This paper hopes to provide some suggestions and countermeasures for enterprises to reasonably formulate and apply performance undertakings.The highlights of this paper are in two aspects: firstly,it selects multiple cases for comparative analysis,covering most cases of using performance pledges,starting from three different cases,and better covering the various types of performance pledge agreements signed;secondly,it qualitatively and quantitatively analyses the possible risk points of using performance pledges in different cases and the evaluation of its effectiveness in suppressing the risk of high premium M&A,which can better The second is a qualitative and quantitative analysis of the possible risk points in the use of performance undertakings in different cases and the evaluation of their effectiveness in curbing the risk of high premium M&A,which can better substantiate the conclusions.