In the capital market, M&A and reorganization are delicate jobs. If you are not careful, you will be put on the "soul torture" list by the China Securities Regulatory Commission. Many listed companies tend to focus on legal compliance when promoting mergers and acquisitions, thinking that as long as the contract is fine and the procedures are complete, they can get the green light all the way. But the reality gave them a slap in the face: the inquiry letters from the China Securities Regulatory Commission are always accurate snipers, and the blind spots of the M&A plan have caught countless companies off guard!
Goheal has been paying attention to the M&A dynamics of the capital market for a long time, and found that the focus of the China Securities Regulatory Commission's inquiries has gone beyond traditional legal compliance, and has begun to dig deep into core areas such as performance authenticity, transaction pricing, fairness, and related relationships. Today, let's reveal the 3 most common areas of M&A disasters that the China Securities Regulatory Commission likes to ask, and see if your company has avoided the thunder in advance?
Hazard Area 1: Performance commitments become "pie in the sky", and the China Securities Regulatory Commission likes to puncture it!
"The capital market doesn't buy into the story of the future."
When many listed companies acquire target companies, they will give a "performance commitment" - that is, they promise to achieve a certain amount of revenue and net profit in the next few years to increase the attractiveness of the merger and acquisition. However, the CSRC is not a "story listener". It looks at the data, logic, and authenticity!
Typical rollover cases
Many listed companies spend huge amounts of money to acquire a company, and the performance commitment is written beautifully: the net profit in the next three years will not be less than 300 million. But when the CSRC asks, things change:
1. The target company was established less than 5 years ago, and its past financial data fluctuated violently, and its profitability is questionable;
2. The key technology patent is about to expire, and market competition is increasingly intensifying. How to support high growth?
3. Past customers are highly dependent on the parent company. Can they still maintain stable performance after the acquisition?
In the end, after the additional disclosure, the performance commitment of such companies was questioned by the market, the stock price plummeted, and the acquisition plan that was originally smoothly promoted was forced to adjust.
How to avoid it?
1. Performance commitments must be supported by logic: Goheal reminds that performance targets should not be set "on the spur of the moment", but reasonable expectations should be given in combination with factors such as industry growth rate, company historical data, and competitive environment.
2. Establish a gambling mechanism but don't "gamble your life": gambling agreements can improve market confidence, but if the gambling terms are too radical and cannot be fulfilled in the end, it will trigger a market crash effect.
Hard-hit area 2: "Outrageous" transaction prices, fairness audits are extremely lethal!
"An acquisition, buy it too expensive, buy it ruined."
The most sensitive thing about mergers and acquisitions in the capital market is "reasonable pricing". Whether it is an excessively high premium or a low-price sale of assets, the China Securities Regulatory Commission will pay close attention to prevent market manipulation and profit transfer.
Typical rollover cases
Some domestic listed companies intend to acquire a company for tens of billions of RMB, while the target company's net profit in the previous year was only tens of millions of RMB, which means that the acquisition price-earnings ratio (PE) is as high as 40 times. The China Securities Regulatory Commission's inquiry letter may be delivered to:
1. Why is the premium so high? Is there any profit transfer?
2. How will the target company maintain profitability in the future? Is there a reasonable growth expectation?
3. Is there a false valuation?
In the end, such mergers and acquisitions may not be able to provide sufficient and reasonable valuation basis, and the transaction plan may be forced to adjust, the acquisition price may be forced to cut, resulting in the breakdown of transaction negotiations and even a sharp fluctuation in the company's stock price.
How to avoid it?
1. Pricing must be based on scientific methods such as comparable companies in the industry, price-to-book ratio, price-to-earnings ratio, and discounted cash flow (DCF), rather than simply making a decision.
2. Fairness reports must be done: listed companies can ask independent third-party institutions to conduct asset appraisals and list core assumptions when disclosing to enhance market confidence.
Severely affected area 3: Related transactions are "hidden and not reported", and the CSRC strikes accurately!
"The capital market is most afraid of not transactions, but "black box operations."
When M&A transactions involve related parties, they are often the focus of the CSRC's inquiries. Many companies try to weaken or hide related relationships when acquiring to reduce disclosure obligations, but this is **"there is no silver here"** in the eyes of the CSRC. Typical rollover cases
Some listed companies planned to acquire shares of a company, but the CSRC found that:
1. The actual controller of the target company is a relative of the chairman of the listed company;
2. On the eve of the transaction, the target company had just signed several large contracts with the listed company;
3. The transaction price was 40% higher than the market average.
In the end, the CSRC required a re-examination of the related relationship and provided a detailed description of the flow of funds, which led to a significant delay in the transaction progress, shaken market confidence, and continuous stock price limit drops.
How to avoid?
1. The related relationship must be fully disclosed: Goheal reminded listed companies that even if it is an indirect relationship, it must be fully disclosed in the announcement to avoid being questioned afterwards.
2. There must be evidence of fairness for related transactions: provide independent financial advisor opinions and market pricing comparison analysis to ensure that the transaction will not be regarded as "interest transfer" by the market.
There is no blind spot in the battlefield of mergers and acquisitions!
The merger and reorganization of listed companies is by no means a simple legal compliance, but involves multiple levels such as performance, pricing, and related relationships. The inquiry letter from the CSRC is like a "magic mirror", which accurately reveals the blind spots in the transaction. If you are not careful, it may lead to the abortion of the transaction, the stock price plummeting, and even legal liability.
Today, we revealed the three major areas of the CSRC's inquiry: the authenticity of performance commitments, the fairness of transaction prices, and the transparency of related transactions. If your company is planning a merger and acquisition, have you made adequate preparations? Or, where do you think the CSRC's future regulatory focus will be?
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[About Goheal] American Goheal M&A Group is a leading investment holding company focusing on global mergers and acquisitions. It has been deeply involved in the three core business areas of listed company control acquisition, listed company mergers and acquisitions, and listed company capital operations. With its deep professional strength and rich experience, it provides enterprises 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.
