A Double Case Study On The Filtering Effect Of Earn-out Payment On M&A Risk

In recent years,with the advancement of China’s economic transformation and upgrading,many listed companies in order to achieve scale expansion and upgrading and adjustment of industrial institutions,have chosen the way of mergers and acquisitions to achieve the purpose,which brings China’s mergers and acquisitions market increasingly active and development.Although M&A can help enterprises transform and upgrade and achieve synergistic effects,a series of strategic risks,financial risks and operational risks derived from M&A follow,so the prevention and control of merger and acquisition risks is of great importance.At present,both parties of M&A in China are used to making performance compensation commitments by the target company to prevent and control the risk of sharp decline in post-merger performance caused by information asymmetry before M&A.However,in the actual process of operation,the default behaviors of the target company frequently occur,such as failure to reach the promised performance,long-term failure to fulfill the obligation of compensation payment.At this time,the acquirer has to make provision for goodwill impairment,which not only affects the performance of the acquirer,but also greatly increases the risk of.M&A.Therefore,both parties of the transaction begin to try to use the earn-out payment method widely used in foreign countries.Earn-out is a deferred and contingent payment method,in which the acquirer pays a fixed price based on a certain proportion of the total transaction price at first,and then pays the remaining price in installments at the later stage.The acquirer sets certain assessment indicators for the target company,and the amount of installment payment is linked with the completion of the assessment indicators of the target company.Under the mode of earn-out payment,the acquirer does not pay the whole transaction price at one time and has the initiative to pay the remaining transaction price.Compared with performance commitment,it can effectively prevent the behavioral risk of the target company refusing to pay compensation.This thesis believes that Earn-out has stronger prevention and control ability in the prevention and control of M&A risks.Therefore,based on the perspective of risk filtering,this thesis selects two cases of Xiwang Food’s acquisition of KERR Company and Tomson Bihealth’s acquisition of LSG Company for study.In this thesis,the process of M&A is decomposed.Firstly,what risks are faced by the two case companies in the early,middle and late stages of M&A,and what are the similarities or differences?It further analyzes how different earn-out clause designs play the role of risk filtering in the early,middle and late stages of M&A,and their effects on the risk filtering in the three stages of M&A.Finally,in order to explore how to maximize the effectiveness of earn-out,this thesis summarizes several cases of acquisition using earn-out,and tries to summarize their specific applicable conditions and characteristics of scheme design,so as to put forward targeted optimization suggestions for scheme design.This thesis believes that the earn-out payment mode plays a role through the coordination of various terms,which can effectively filter the risks in various stages of M&A,and can play a better role in the M&A of multinational,cross-industry,small broad and target companies as asset-light or emerging industries.In addition,this method is not perfect,but can be further optimized by setting margin clauses and combining with equity payment methods.This thesis hopes that the case study can better play the role of earn-out risk filtering in actual M&A activities,and provide more detailed reference for China’s M&A transactions in the future.