Summary of Key Points
With policy encouragement, the enthusiasm for M&A and restructuring in the A-share market has risen, but recently many listed companies have seen their M&A projects fail midway. For example, the major deal where Keda Manufacturing planned to acquire a subsidiary for 7.5 billion yuan was rejected by the stock exchange due to review concerns. Other companies such as Zhiguang Electric, Huijin Shares, and Dinggu Jichuang also terminated their M&A attempts due to issues with valuation, cross-industry terms, or changes in the market environment. Auditors point out that the difficulty in valuing intangible assets of high-tech companies is a major challenge. Experts suggest mitigating risks by focusing on three areas: controlling premium payments, designing flexible transaction structures, and ensuring effective post-acquisition integration.
Case Studies of Recently Terminated M&A Attempts
1. Keda Manufacturing's 7.5 Billion Yuan Acquisition Rejected: Keda Manufacturing intended to acquire 51.55% of the subsidiary Tefu International for a total of 7.475 billion yuan to achieve full control. However, the Shanghai Stock Exchange's restructuring committee questioned the feasibility of Keda Manufacturing's ability to control Tefu International and the rationale for its revenue growth, leading to the rejection of the deal.
2. Zhiguang Electric Canceled the Acquisition of Its Energy Storage Subsidiary: Zhiguang Electric planned to buy 27% of its energy storage subsidiary for 776 million yuan, increasing its stake to 94%, and also sought to raise 537 million yuan in additional funds. The deal was canceled due to the company's consecutive five-year losses on a net basis (totaling over 1.1 billion yuan).
3. Huijin Shares' Cross-Industry M&A Failed: Huijin Shares aimed to acquire a 20% stake in the wind energy company Cooper New Energy in cash, but the two parties could not reach an agreement on key terms such as price and voting rights, resulting in the termination of the deal.
4. Dinggu Jichuang's Cross-Industry M&A in the Electronic Information Sector Failed: The custom furniture company Dinggu Jichuang planned to buy 51% of the electronic information company Xi'an Sidende for 268 million yuan. After half a year of planning, the deal was canceled due to changes in the market environment and the actual circumstances of both companies.
Three Common Reasons for M&A Failures
1. Rejection by the Stock Exchange: Stock exchanges conduct thorough reviews of M&A proposals. For instance, Keda Manufacturing was questioned about the stability of its control over the target company and the logic behind its revenue growth, leading to the rejection of its proposal.
2. Disagreements on Cross-Industry M&A Terms: When companies from different industries merge, there are often conflicts over key terms such as price, voting rights, and performance commitments.
3. Valuation Disputes: The core assets of high-tech companies (such as patents and R&D teams) are intangible, making valuation difficult. The future value of these assets is uncertain, leading to disagreements between buyers and sellers.
The Biggest Challenge in M&A of High-Tech Companies: Valuing Intangible Assets
The core assets of high-tech companies (e.g., unprofitable AI or semiconductor firms) are intangible assets like patents and R&D teams. Valuing these assets is extremely challenging:
- It's uncertain whether the technology will be successful and profitable in the future.
- Goodwill (the additional cost of acquiring the company) can be inflated, and if the technology fails to be implemented, it may result in a significant reduction in the company's value, affecting its profits.
This situation is akin to buying a "blind box": buyers fear overpaying, while sellers worry about underpaying, making it difficult to reach a consensus.
Expert Recommendations to Mitigate M&A Risks
1. Control Premiums for High-Tech Companies: Avoid overvaluing high-tech companies based on their potential rather than their current value, and ensure the valuation reflects the actual potential of their technology.
2. Design Flexible Transaction Structures: Use a combination of cash and equity payments, and make payments in phases (e.g., pay a portion upfront and the remaining amount after achieving performance targets). Also, include performance-based agreements where the seller may have to compensate if the target company fails to meet the agreed-upon metrics.
3. Ensure Effective Post-Aquisition Integration: M&A is not just about acquiring the company; it's about integrating the technologies, businesses, and cultures of both parties. This integration is crucial for turning the acquired assets into profitable products and offsetting the initial valuation premium through actual earnings.
Conclusion
M&A and restructuring can be an effective way for listed companies to address weaknesses and expand their business. However, success is not guaranteed, especially in the high-tech sector, where valuation and integration pose significant challenges. For investors, it's important to evaluate whether the target company possesses genuine core technologies, whether the pricing is reasonable, and whether there are performance-based agreements in place to avoid potential pitfalls. For companies, it's essential to carefully consider whether the acquisition aligns with their strategic goals and whether they have the ability to manage the acquired assets effectively. Otherwise, the investment could lead to financial losses.