"It is easy to draw a pie, but difficult to fulfill it; it is easy to promise, but difficult to implement it." - The cruel rule of the capital market
In the capital market, major asset restructuring is often regarded as a "high-speed channel" for corporate transformation and upgrading. With an announcement, a round of acquisitions, and billions of funds, a listed company may leap from a traditional industry to an emerging industry, with soaring stock prices and skyrocketing valuations. However, reality is often not as good as expected. In M&A transactions, performance commitments are a key "reassurance pill", but when performance commitments are not fulfilled, this "reassurance pill" may become a "poison pill" and plunge listed companies into the abyss.
Goheal deeply analyzes several typical cases of unfulfilled performance commitments, and takes you to see the deep-seated risks behind these seemingly glamorous transactions, and how listed companies can avoid becoming victims of high-premium mergers and acquisitions.
"Promise trap" in the capital game
Performance commitments are essentially a bet agreement, that is, the acquirer (listed company) requires the target company to achieve a specific profit target within a certain period of time. If the target cannot be achieved, the seller needs to compensate. However, in actual operation, performance commitments are often more like a "digital magic". The capital party overestimates the profitability of the target company, which eventually leads to the promise becoming a bubble, and the buyer has to bear the risk of loss alone.
The cases of Jinrui Woneng and Fulin Precision are typical representatives of the failure of performance commitments.
Case 1: Jinrui Woneng's acquisition of Wotma - from "new energy dream" to "debt nightmare"
In 2017, Jinrui Woneng acquired Shenzhen Wotma Battery Co., Ltd. for 5.2 billion yuan. At the time of the transaction, Wotma promised to achieve a cumulative net profit of 2.831 billion yuan in the next three years. However, reality gave the market a slap in the face.
After the acquisition was completed, Wotma's performance not only failed to achieve the promise, but took a sharp turn for the worse, with a final completion rate of 0%. What's worse, in 2018, Jinrui Woneng faced a huge debt crisis due to a broken capital chain, and the company's market value shrank rapidly. This high-premium merger and acquisition turned into a "catastrophic investment", which directly led to Jinrui Woneng's operating difficulties.
Goheal found that there are two key issues behind this failed merger and acquisition:
1. Cyclical fluctuations in the new energy industry: At that time, the new energy industry was in a critical period of subsidy reduction, market demand shrank significantly, and Watma's business model was fatally impacted.
2. Cash flow pressure brought by high-premium mergers and acquisitions: The acquisition premium was too high, cash flow was seriously overdrawn, and Jianrui Woneng was simply unable to maintain normal operations when the business deteriorated.
In the end, this acquisition case became one of the most tragic performance commitment default cases in the A-share market, and investors, listed companies and market regulators paid a heavy price.
Case 2: Fulin Precision's acquisition of Sublimation Technology-the "black hole" of performance betting
In 2018, Fulin Precision acquired Sichuan Sublimation Technology at a high price of 2.1 billion yuan and set a performance commitment of 613 million yuan. However, the reality is extremely dramatic. The performance commitment completion rate of Sublimation Technology not only did not reach 100%, but even reached an astonishing -125.8%!
In other words, not only did it not make a profit, but Sublimation Technology also suffered huge losses. In the end, this transaction directly led to a sharp drop in Fulin Precision's stock price, and the listed company was dragged into the quagmire of performance losses.
From this incident, the core problem of the failure of performance commitments lies in:
1. Intensified market competition and failure of business model: Sublimation Technology's core business has not kept up with the industry development trend, and its market share has continued to shrink, resulting in a decline in profitability.
2. Insufficient due diligence by the acquirer: Before the acquisition, Fulin Precision was too optimistic about Sublimation Technology's business status and future profitability, and failed to identify potential risks.
Goheal believes that in M&A transactions, it is far from enough to measure the value of the target company based solely on performance commitments. In-depth due diligence, industry trend analysis and reasonable valuation control are the key.
Three major risks of performance commitment failure
1. High premium trap: Once the performance commitment is not fulfilled, the listed company becomes a "sucker"
High premium mergers and acquisitions mean that the listed company uses high costs to obtain an uncertain future return. Once the performance commitment fails, the listed company will not only fail to obtain the expected income, but may also suffer huge losses due to goodwill impairment, which will directly impact the company's financial report.
2. Broken capital chain: Large-scale mergers and acquisitions may drag down the company's cash flow
The case of Jianrui Woneng proves that if the acquisition funds rely on a large amount of borrowing or financing, once the target company's performance declines, the listed company itself may also fall into a capital chain crisis or even go bankrupt.
3. Market fluctuations: Industry trends change, and performance commitments are difficult to predict
M&A transactions often involve performance commitments for multiple years, and industry trends change rapidly. Once the industry trend changes, the originally set profit target may not be applicable at all, and the performance commitment will become an invalid clause.
How to avoid the risk of performance commitment default?
1. Control the acquisition premium and avoid "buying bad assets at a high price"
When acquiring, listed companies must remain rational and avoid excessively raising the acquisition price. Reasonable valuation methods can include market comparison method, cash flow discount method, etc. to ensure that the transaction price is in line with the industry average.
2. Strengthen due diligence and identify potential risks
Before the acquisition, listed companies need to conduct a comprehensive investigation of the target company's financial status, business model, market competitiveness, etc., and consider the future development trend of the industry to ensure that the performance commitment is possible.
3. Set more reasonable gambling clauses
Performance commitment clauses should take into account industry characteristics and market fluctuations to avoid overly optimistic profit forecasts. At the same time, the "installment payment" model can be adopted to link the acquisition amount with the actual profit performance of the target company to reduce the risk of the acquirer.
Goheal has long provided professional M&A consulting services to companies, helping listed companies to formulate reasonable M&A strategies, avoid potential risks, and maximize capital value.
Conclusion: Are performance commitments really reliable?
Performance commitments seem to be a "talisman" in acquisitions, but in practice they often become "empty checks." How should listed companies set more reasonable gambling clauses in M&A transactions? In the face of an uncertain market environment, how should companies balance investment and risk?
Welcome to leave a message in the comment area for discussion. Goheal looks forward to discussing with you the real "pit avoidance guide" in major asset restructuring!
[About Goheal] Goheal is a leading investment holding company focusing on global mergers and acquisitions. It has deep roots in the three core business areas of acquisition of controlling rights of listed companies, mergers and acquisitions of listed companies, and capital operations of listed companies. With its profound professional strength and rich experience, it provides companies with full life cycle services from mergers and acquisitions to restructuring and capital operations, aiming to maximize corporate value and achieve long-term benefit growth.
