Study On Risk Prevention And Control Of Cross-Border M&A Based On Earnout

At present,China’s M&A market shows a rapid development trend.For strategic transformation and expanding overseas markets,more and more enterprises choose to carry out cross-border M&A.While pursuing high returns,they also need to face very large cross-border M&A risks.At present,VAM is often used in China to prevent and control M&A risks.Their original intention was to reduce the valuation differences between the two parties through a performance compensation mechanism,but in practice,it actually increases the risk of M&A.Therefore,the earnout,which is widely used in M&A transactions abroad,has attracted the attention of domestic scholars and enterprises.It is a valuation adjustment mechanism.The rest of the pay-to-play deals also reconcile valuation differences,but are better positioned to protect against cross-border M&A risks because earnouts help the main parties take more ownership of payments.At present,China’s M&A market is developing rapidly.For strategic transformation and expanding overseas markets,more and more enterprises choose to engage in crossborder M&A.At present,domestic gambling agreements are often used to prevent M&A risks.Its original intention was to reduce the valuation difference between M&A parties by using a performance compensation mechanism.However,in practice,it often leads to a high valuation premium,even if the M&A party refuses to pay compensation or fails to realize the expected net profit,which leads to the deterioration of the M&A party’s business condition and raises merger risk.Therefore,the earnout,which is widely used in M&A transactions abroad,has attracted the attention of domestic scholars and enterprises.It is a valuation adjustment mechanism.The rest of the pay-to-play deals also reconcile valuation differences,but are better positioned to protect against cross-border M&A risks because earnouts help the main parties take more ownership of payments.This paper aims to explore how to prevent and control cross-border M&A risk by using an earnout,based on relevant theories and literature,and the case of BBHI in digital knowledge technology cross-border M&A.It is found that the control mechanism of the profitability payment scheme is consistent with all stages of cross-border M&A transactions,and the contingent payment scheme can mitigate the valuation risk of information asymmetry in the pre-M&A period.In the middle of M&A,the combination of cash and equity can reduce the financing and payment risk of the main merging party.In the latter stage of M&A,the excess incentive mechanism in the additional clause of the earnout can play an incentive role for the core management and talents,reducing the risk of human resources integration and helping the latter stage of integration be better completed.Then,by using the event research method and some financial indicators,the prevention and control effects are analyzed from both a short-term and long-term perspective.Based on this,it is proposed that in risk prevention and control,the earnout has better risk response ability and a better management incentive effect,but it will also lead to uneven risk distribution and a myopic effect of management.The inspiration of this paper is that enterprises can refer to the case of digital technology cross-border BBHI.Its specific scheme design is worth referencing and referencing.Investors should remain rational,and finally,the relevant regulatory authorities should improve relevant laws and regulations as soon as possible to promote more and better use of profitability payment schemes in China.