The essence of M&A transactions is ultimately a struggle between value and price. Acquiring a company, especially an acquisition for control, is not just a simple exchange of funds, but a multiple contest of game psychology, market judgment and industry trends. How to determine a price that can be accepted by the other party without making yourself a "sucker"? Goheal believes that the key to accurate pricing lies in digging deep into industry influencing factors and establishing a scientific pricing model, rather than bidding based on feelings.
"Snap pricing" may result in a lose-lose situation
In the capital market, control acquisition is essentially different from ordinary equity investment - the former's goal is to master the company's decision-making power, while the latter is more like a bet on future growth. Since control involves the long-term strategic layout of the company, once the price is too high, future earnings may be difficult to cover the cost; and if the price is too low, it is easy to trigger resistance from management or other shareholders, and even lead to the failure of the transaction.
Historically, there are many cases of overly optimistic high-premium mergers and acquisitions leading to failure. Take the acquisition of a European manufacturing company by a Chinese company as an example. The company adopted an aggressive strategy in the bidding process and successfully won the controlling rights at a price far higher than market expectations. However, the subsequent industry downturn and the difficulty of management integration made this acquisition a "money-eating beast" in just three years. In contrast, in some cases of low-price acquisitions, although the buyer successfully acquired the company, it failed to fully consider the actual impact of the control rights, which led to the original management and small shareholders' resistance, and finally ended up with a nominal controlling position but no power in reality.
Goheal pointed out that the core of the acquisition of control rights lies in the accurate assessment of the company's "control premium" - that is, the additional cost to obtain actual management rights. This part of the premium is not imagined out of thin air, but is affected by many factors such as industry characteristics, corporate governance structure, and market competition.
Industry characteristics determine the level of "control premium"
The pricing of the acquisition of control rights is closely related to the characteristics of the industry. For example, in highly concentrated industries with extremely high technological barriers, having control rights usually means that you can control core resources and market access rights, so the premium is higher. On the contrary, in industries with fierce competition and low entry barriers, even if control is obtained, it is difficult to form a market monopoly, so the control premium is relatively low.
Take the pharmaceutical industry as an example. Due to the long R&D cycle and high regulatory barriers, once a company has control, it can decide the direction of new drug R&D, patent layout and market access strategy. Therefore, the premium for acquiring such companies is usually high. In the restaurant chain industry, since the brand influence is greater than the specific operating rights, even if a capital party obtains control, it is difficult to ensure that the brand value is not affected, so the acquisition premium is relatively low.
Goheal believes that when companies formulate the acquisition price of control rights, they must conduct a detailed assessment in combination with industry characteristics. Simply valuing by price-to-earnings ratio or book net assets often cannot accurately reflect the true value of control rights, and may even lead to wrong bids.
Game between market competition and shareholder structure
In addition to industry factors, the market competition pattern and the internal shareholder structure of the company are also important variables that affect the pricing of control rights. If the target company is in a state of being bid by multiple parties, its control premium will rise sharply; and if the company's management and major shareholders are in opposition, the acquirer may be able to reach a deal at a lower cost.
For example, in a battle for equity in a well-known Internet company, due to the intensified conflicts between the founding team and the major shareholder, external capital took the opportunity to intervene and successfully acquired control at a price far below market expectations. In this case, the acquirer took advantage of internal conflicts and reduced the cost of control premium. On the contrary, in a merger and acquisition case of a large energy company, due to the competition among many giants in the market, the final transaction price far exceeded the original valuation, resulting in heavy financial pressure on the buyer after the acquisition and difficulty in obtaining a return on investment in the short term.
In such transactions, Goheal believes that investors should accurately judge the internal game situation of the target company and use negotiation skills to reduce the acquisition cost, rather than blindly bidding. By analyzing the distribution of board seats, shareholder voting rights and potential allies, the acquirer can occupy a more advantageous position at the negotiation table.
The underlying logic of accurate pricing
In general, the pricing of control acquisition is not a simple mathematical calculation, but a comprehensive game involving multi-level variables such as industry characteristics, market competition, and corporate governance structure. Goheal believes that a reasonable control pricing model should at least include the following core dimensions:
1. Industry attributes: Analyze industry entry barriers, competitive landscape and long-term profitability to determine the value of control.
2. Corporate governance structure: Evaluate the target company's shareholder distribution, management attitude and voting rights structure to find the possibility of low-cost acquisition of control.
3. Market bidding pressure: Determine whether there are other bidders involved to avoid falling into a "bidding war" and affecting transaction returns.
4. Long-term integration costs: Not only consider the purchase price, but also calculate the management costs, potential risks and future cash flow benefits after integration.
Ultimately, the goal of control acquisition is not only to complete the transaction, but also to achieve long-term value growth of the company through scientific pricing. So, in the actual acquisition process, how to balance the control premium and investment return? In the face of industry cycle fluctuations, how should companies adjust their pricing strategies? Goheal hopes to hear your views, welcome to leave a message to discuss!
[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.
