Zhu Wuxiang: Bomb Disruption Goodwill Thunderstorm
Bomb Disruption Goodwill Thunderstorm Original: Zhu Wuxiang goodwill is essentially a high-risk asset. To solve the problem of thunderstorms in which goodwill assets are impaired, the core is to avoid overvaluation 北京桑拿 of mergers and acquisitions and increase the success rate of mergers and acquisitions.
The author of this journal Zhu Wuxiang / Wen Goodwill impairment storms came.
On the eve of the Spring Festival in 2019, 120 listed companies are expected to exceed 1 trillion US dollars in 2018, nearly 60 listed companies have a pre-loss of more than 1 billion US dollars, and 8 companies have a pre-loss of more than 3 billion. The highest is Tianshen Entertainment (002354.
SZ) Pre-loss of 7.8 billion yuan.
What is even more shocking is that the amount of more than a dozen listed companies’ advance losses exceeded their market value.
For example, Tianshen Entertainment has a market value of 4.4 billion and a pre-deficit of 7.8 billion; Huaying Technology (000536).
SZ) with a market value of 50ppm and an estimated loss of 5.5 billion yuan; Huaye Capital (600240).
(SH) The market value is 3.2 billion, with a pre-determined loss of 5 billion; Liyuan Refined has a market value of 3.2 billion, with a pre-debt of 4.8 billion.
The superficial cause of this phenomenon is the impairment provision of goodwill assets.
Because according to accounting standards, the difference between the purchase consideration and the net asset value of the acquired company is included in goodwill assets.
If the acquired company’s operating performance is not good, according to the existing principles of accounting stability, goodwill assets need to accrue bad debts at one time.
Around 2015, in order to boost the market and solve the quality problems of listed companies, the government and regulators issued policies to encourage listed companies to conduct market value management and mergers and acquisitions, and the stock market was in a bull market.
Many listed companies have a high premium (the net asset value of the acquired company) to acquire non-listed companies, especially emerging industries, and high-growth asset-light companies, which have accumulated billions of goodwill.
For example, Shanghai Rice (002252.
SZ) goodwill of 5.4 billion yuan, Wanda Films (002739).
SZ) Goodwill of 5.2 billion, Oriental Precision (002611).
SZ) 4.1 billion, Huayi Brothers (300027).
SZ) 3.6 billion, Leo shares (002131).
SZ) 3.2 billion, Songcheng Performing Arts (300144).
SZ) 2.4 billion, two three four five (002195).
SZ) 2.4 billion, Aotecar (002239).
SZ) 1.9 billion, Weiwei Culture (002502).
SZ) 1.8 billion.
In order to avoid the risk of high-premium mergers and acquisitions, listed companies usually make a bet agreement with the actual controller of the acquired company three times in three years.
Three years later, many of the gambling agreements have expired, and the operating performance of a large number of acquired companies is far from their original commitments.
Following the current principles of accounting soundness, goodwill assets need to accrue bad debts at one time.
Because the operating income and profit scale of these listed companies are not large, the net profit is between one-thousandths to millions; during the downturn of the stock market, the market value scale is billions.
Therefore, withdrawing billions of dollars of goodwill assets into bad debts at one time, billions of dollars are formed, exceeding the company’s market value!
The phenomenon of thunderstorms for impairment of goodwill assets has led to reflections, mainly focusing on the accounting treatment of goodwill.
However, it is not enough from the perspective of accounting standards to solve the problem of thunderstorms for impairment of goodwill assets.
Because goodwill originates from a merger that has already occurred and is a sunk cost; huge amounts of goodwill assets are derived from a high valuation relative to the net asset value of the acquired company, while the impairment of goodwill stems from the poor operating performance of the acquired company.
Therefore, the core of reducing the risk of goodwill is to avoid overestimation of mergers and acquisitions and improve the success rate of mergers and acquisitions.
This article discusses the causes of the high risk of goodwill assets, and proposes some solutions to avoid high expectations of mergers and acquisitions.
The causes of high risk of goodwill assets can be divided into two categories: endogenous inherent reasons and exogenous enhanced causes.
Among them, the endogenous inherent causes of goodwill risk are firstly due to the definition of corporate value and discount estimation models.
The definition of corporate value in modern finance is the discounted value of the free cash flow expected to be generated in the future. The specific estimation model includes the most basic free cash flow discount model and the stock market. Investors in the private equity market are guided by a variety of comparable models.Company evaluation model, comparable company evaluation model can be converted into future expected free cash flow discount model.
When using an enterprise evaluation model to evaluate an enterprise, it is assumed that the enterprise is sustainable and will not experience a financial crisis or be able to survive it.
For normal operating companies, when using the free cash flow discount model, there are usually two stages to predict free cash flow: the first stage is the growth period, usually 5-10 years; the second stage is the sustainable operating period, fromStarting from the 6th to 11th years, discounting the future free cash flow predicted in the two stages to the present is the enterprise value, which usually exceeds the net asset value.Therefore, if mergers and acquisitions, goodwill will arise.
For companies in the mature stage, the estimate in the second stage accounts for about 30% of the total enterprise valuation; for emerging growth companies, the free cash flow in the first stage is negative, so the company valuation in the first stage is negative;It is estimated that the proportion of the second stage will exceed 100%.
For example, Mobike, OFO . Maybe, this is high risk under uncertain business conditions inside and outside the enterprise and in a competitive environment!
Because it is difficult for most companies to achieve continuous growth and sustainable operation, the period of continuous growth and operation will not be too long; or they will fail because of lack of competitiveness, or because of changes in the economic environment, encounter financial crisis or even go bankrupt.
For example, film and television companies can’t guarantee that they can shoot high-grossing film and television works every year. Game companies can’t guarantee that they can develop high-profit games every year. Technology companies face technological change and model disruption, and they can’t guarantee victory in the competition.
Even the companies that are already at the head of the industry cannot guarantee the long-term foundation.
Therefore, the discount model forms the inherent risk that the company estimates.
If the M & A target company is evaluated according to the discount model, the more optimistic the forecast of the company’s future earnings growth, the estimate will be converted, and the difference with the company’s net assets, that is, goodwill, will also increase the inherent risk of goodwill.
In fact, the inherent endogenous causes of goodwill risk include the discount trading mechanism of the stock market.
What does the stock market do?
Academically speaking is a place to optimize the allocation of resources in time and space. Realistically speaking, it is a place for corporate equity financing, a place for the discovery of corporate investment value, and a place for rapid appreciation or destruction of investment and wealth.
In fact, the essence of the stock market is to provide a mechanism and place for discounted trading of expected future earnings of the enterprise.
Prior to the absence of the stock market, corporate equity transactions were estimated using the asset replacement value method.
After the emergence of the stock market, the discounted estimation method of future expected income naturally appeared.
When a company goes public, its founders and shareholders are often worth dozens of times, and their value has increased by dozens of times. People often call it “rich overnight”!
In fact, it’s just that the expected future earnings of the company are discounted.
In other words, investors are paying for and predicting future expected earnings based on the company’s sustainable growth and sustainable operating assumptions!
Therefore, the definition and transformation of corporate value in modern finance, the discount estimation model, and the conversion into the stock market’s discount trading mechanism are realized.
However, in a real business environment, it is difficult for most companies to continue to grow and operate sustainably.
Therefore, estimating the purchase order and transaction according to the future expected return discount model objectively forms the inherent risk of corporate equity investment.
The high external risk of goodwill assets The externally enhanced factors caused by goodwill risk are the investors’ potential expected future returns and discounted estimates, leading to high stock market multiples and raising the benchmark for M & A estimates.
Stock market investors are trade-guided, and gradually investors will not use free cash flow discount models to value listed companies.
Because it requires a lot of information and expertise, it is relatively complicated.
Investors usually use comparable company evaluation models, or technical map analysis, momentum analysis.
However, no matter what estimation model and pricing method is used, the price of stocks bought or sold is based on the discounted future expected earnings of the company.
Historical experience shows that whenever a technological revolution occurs, a number of new and emerging high-growth companies will emerge.
In the past ten years, the Internet, biomedicine, new media, new retail, artificial intelligence, big data, cloud computing, new materials and other technological innovations have made breakthroughs in total, coupled with new models, a large number of new enterprises have emerged.
Investors are often optimistic about the continued growth capabilities of these emerging companies, and listed companies merging these emerging industry companies have given an optimistic response.
Because there are indeed some emerging industry companies that have achieved operating scale, continued high growth in operating performance and stock market value, some investors have soared wealth.
If other policies are promoted, for example, good macro fundamentals, loose capital and loose regulatory policies will create a bull market.
The results show that listed companies, especially those in emerging industries and companies that wish to go public, generally have high market value multiples (PR, EDITDA, PE, PB multiples are high).
For example, Chongqing Beer (600132.
(SH) As a regional beer company, its beer business is estimated based on the industry’s average P / E ratio of 25 times, with a market value of only about 4 billion.
However, as there is another hepatitis B vaccine project under development, investors are optimistic that its market value once reached 28.6 billion, surpassing Tsingtao Beer (600,600.
SH), the price-earnings ratio is more than 100 times.
Stormwind Group (300431.
(SZ) was listed on the GEM on March 24, 2015. The 40 cases of listing went up and down 36 consecutive stops, starting from the issue price of 7.
14 yuan soared to 327.
At 01 yuan, it set a record for daily limit of A shares. The total market value soared to 34 billion yuan, and the price-earnings ratio reached hundreds of times.
Based on optimistic expected future earnings and discounting existing high market value multiples, it implies that the continued growth in the next 5-10 years is very high.Establishing a company does not actually have the ability to achieve it, or the probability of realization is low.
However, it has formed a market value performance that greatly exceeds the net asset value, which has become a reference for the issue of listed companies’ mergers and acquisitions and reorganizations, which implies a huge amount of goodwill risk.
For example, Chongqing Beer plunged for a long time because of the successful replacement of the hepatitis B vaccine clinical trial!
Storm Group subsequently experienced a series of operational problems, which dropped sharply. At the end of 2018, the market value dropped to 90% from its highest value.
In fact, the external enhancement factors arising from goodwill risk also include listed companies’ estimates of M & A and M & A integration risks based on the market’s high market value multiples benchmark.
M & A is a routine and important way for companies to grow.
In order to achieve the existing growth of existing business, or to protect the shell, the listed company’s actual controller will merge and acquire a company with good growth prospects, obtain the financial performance of the acquired company, and control its resources; or the purpose is to speculate and cater toMarket hype concept, M & A with high market value.
Regardless of the motivation, the acquisition of a company also uses a discounted estimation model of future expected returns based on the definition of enterprise value.
Because if the merged company operates normally, it is impossible to accept the assets recognized in accounting and sell the controlling stake of the company at the historical cost or replacement cost of the assets, because this means that it does not recognize the company’s operating capabilities.
Listed companies are operating guides. They can reasonably go through detailed due diligence to understand more about the internal operating status of the merged and acquired companies than external investors in transaction guidance, make more realistic assumptions, and then use the most basic free cash flow discount.The model estimates, rather than refers to stock market trading guidance, investors based on potential expected market value multiples.
However, in reality, both parties to an M & A transaction and the M & A financial adviser often refer to the multiples of the market value of comparable companies in the stock market to value the M & A company.
In a bull market, the optimistic expectations of the stock market have led to high market value multiples for high-growth companies in emerging industries.
In addition, good M & A companies have strong negotiation levels.
If the acquirer’s listed company gives the M & A company a low multiple, the M & A company will not accept it.
The merged company will think that if it is listed on its own, it is estimated that it will be higher based on the market value of comparable companies.
Therefore, when a listed company merges and acquires in a bull market, the evaluation and goodwill of the acquired company will also increase with the market.
In addition, new technologies, new economies, new models of enterprises, less tangible assets, operating capabilities, IP and other intangible assets are involved.
According to accounting standards, it belongs to asset-light companies.
It is estimated that the net assets are small, and the goodwill assets are naturally higher.
However, historical experience and empirical research show that the risk of achieving expected returns after mergers and acquisitions is relatively high.
In addition, after a high-buy multiple acquisition in a bull market, the actual operating performance is often very different from what was originally expected.
Why is it not easy to achieve the expected benefits after the merger?
M & A seems to just replace the controlling shareholder of the enterprise, but M & A faces three major risk factors.
The first is the risks inherent in the business development and future expected earnings of the acquired company.
Even if it is not acquired, in the actual business environment, the original company’s continued operation and future expected returns are inherently risky.
Including changes in external economic conditions such as the state of macroeconomic prosperity, industrial policies, and financial market financing conditions, as well as changes in conditions such as the company’s own operating strategies and competitive advantages.
For example, who can predict the eagle farming and animal husbandry (002477) of 2017 net profit of 45.19 million yuan.
SZ), with a pre-debt loss of 3.3 billion yuan in 2018!
Who Can Foresee Zhangzi Island (Protection of Rights) (002069.
SZ) Scallops are missing by the cold water mass!
In addition, new technologies, new economies, and new models of emerging companies are operating with stability and sustainable capabilities that are still in the process of being cultivated, with high operating risks.
The second is the control and integration risk of the acquirer’s ability to acquire the resources of the acquired enterprise.
An enterprise is a transaction structure formed by several stakeholders with different resource capabilities.
After the replacement of the controlling shareholder, the assets under the name of the corporate legal person can be controlled, but the resource capacity controlled by other non-corporate legal persons may be stuck with the original controlling shareholder.
For example, the resources of team, user and even brand are related to controlling shareholders.
For example, Lenovo’s acquisition of IBM PC faces the risk that the US government, a 10% user, will lose information under the pretext of information security.
The acquisition of controlling shares replaced a key transaction subject-the shareholder-in the original stakeholder transaction structure. It may also change the attitudes and behaviors of other stakeholders, working systems, management practices, different habits, difficult integration, and may occur.Exclusion and suffering.
If the new controlling shareholder’s reputation, strength, and resource capacity cannot bring sufficient synergistic value-added effects, the original stakeholder transaction relationship may be weakened, and the ability to control and use the resources of the acquired enterprise will be greatly discounted.
For example, the original leader, the user did not cooperate, did not recognize, negatively responded, the motivation of the acquiree’s operating team, the sense of responsibility decayed, and even left the company to establish another mountain, leading to the loss of key resource capabilities and orders.
The third is the risk of fraud and concealment of major hidden dangers by the actual controller of the acquired company. The actual controller of the acquired enterprise may also collude with the intermediary agency and the relevant personnel of the acquirer, cooperate internally and externally, and cheat.
For example, providing false orders, reserves, financial performance, and possibly concealing significant negative and risk information.
For example, hidden guarantees, contingent liabilities, tax non-compliance and other risks lead to high valuation risks.
Even with due diligence, it’s hard to spot for a while.
Therefore, if the risk of achieving the expected return after the merger is high, it will undoubtedly increase the risk of goodwill assets!
On May 23, 2016, the Fengfeng Group co-investors set up an acquisition fund and acquired the asset-light European sports copyright agency MP & Silva Holding S. at a valuation of US $ 1.4 billion.
A (hereinafter referred to as “MPS”) 65% of the shares.
MPS is a company founded by three Italians in 2004. In the more than ten years that the global sports copyright market has been rapidly heating up, MPS has gradually grown from an unknown little player to a prominent copyright giant.
At the time, it had copyrights in more than a dozen top international events such as the World Cup, the Premier League, Serie A, Ligue 1, the French Open, F1, NFL, and NBA.
However, after the storm group’s M & A fund entered the MPS, MPS went downhill.
In October 2017, MPS lost to rival IMG in the bidding for international copyright in Serie A. This is also the first time that MPS has lost Serie A copyright since its establishment.
In the same year, BeIN seized the copyright of Ligue 1 from MPS.
Since then, MPS has been losing ground in the sports copyright market, and due to the inability to pay copyright fees, some major copyright parties have terminated their contracts with MPS in advance, and some have directly brought them to court.
In October 2018, with the Bankruptcy Liquidation Order of the British High Court, the once brilliant MPS became history.
Obviously, the acquisition of MPS companies will face the above three risks: their own operational risks, integration risks, and the moral risks of the founder of the acquiree.
Measures to reduce the risk of goodwill impairment The key to solving the problem of goodwill risk is not how to measure goodwill and change the accounting treatment of goodwill, but to avoid high-value mergers and acquisitions and improve the success rate of mergers and acquisitions.
This article mainly proposes some countermeasures on how to avoid high valuation of mergers and acquisitions.
For the actual controller of a listed company, first of all, it is necessary to change the concept of corporate control, and not to acquire or discount the future earnings of the company to be acquired.
Without a controlled acquisition of the shares of the acquired company, there is no need to discount the uncertain future expected earnings of the acquired company.
Mergers and acquisitions are usually aimed at gaining control over the performance and resource capabilities of the acquired company.
But there are many ways to control the resource capacity of an enterprise, and it does not have to be achieved through capital holding acquisitions.
Such as order control.
Li & Fung provided 30% -70% of orders to partner factories, and Apple bought out the supply of GATA’s sapphire screens.
Operational resource capacity enables transaction + revenue sharing.
The Xiaomi Mode Intelligent Hardware Ecological Chain Division provides qualified entrepreneurial enterprises with the resources and capabilities formed by the mobile phone business, including: customer capacity, brands, supply chain management, product design, investment and other resource capabilities to empower entrepreneurial enterprises., Do not seek a shareholding, and start-up business revenue sharing.
Establish a joint venture with a specific operation of the acquired company rather than acquiring the entire enterprise.
For example, joint ventures set up sales companies, joint venture factories, joint research and development, and joint venture management companies.
Joint venture with the management team to lease the assets of the original corporate legal person, including patents and brands.
Custody of the acquired company and incremental revenue sharing.
Secondly, the actual controller of a listed company should also change its acquisition strategy and reduce the discounted valuation of the acquired company.
Mergers and acquisitions in the reverse of the market value cycle of the stock market, that is, mergers and acquisitions during the trough period of the stock market’s multiples.
Acquisition of corporate assets, etc. using the replacement cost method.
Thirdly, the actual controller of a listed company can also adjust the discount strategy and payment method of the acquisition valuation to maintain flexibility.
Discounted valuation and payment of consideration in stages.
For companies with high expected return risks in the future, discounted in stages.
For example, discounting the expected income of 2-3 years as a period, and re-evaluating each period to avoid discounting the expected returns of the uncertain and risky sustainable operating assumptions at one time.
Discounted valuation based on conservative forecast of the future earnings of the merged company + give the shareholders of the merged company a call option.
It is difficult for companies to control the market capitalization multiples of the stock market, but it is not passive to accept the market capitalization multiples benchmark to value the acquired company.
If the stock market or private equity market or the M & A market has high value multiples for companies in the relevant industry, the valuation premium of the acquired company will rise to a high level; or the valuation multiple given by the acquired company itself is relatively high, resulting in the valuation of both partiesThe results are very different, you can abandon the M & A transaction; you can also adjust the valuation strategy and design a new M & A transaction payment method to achieve a win-win transaction.
The acquirer can adopt the conservative assumption of low growth or no growth for the acquired company, predict its future earnings, and then discount the valuation; at the same time, set the acquired company to buy the acquirer’s company’s stock at a predetermined share price in the next few yearsOptions.In this way, the contribution of the shareholders of the acquired enterprise can be compensated based on the actual performance of the acquired enterprise.
Discounted estimates based on the optimistic forecast of the future earnings of the acquired company + bearish budget.
If the M & A company evaluates the high price and cannot get down, you can also recognize the overvaluation first, but set yourself a compensation for the bear price.
In the first half of 2010, Chongqing Beer was sought after by investors for its hepatitis B vaccine, which has a market value of 28.6 billion yuan.
The value of its beer business is estimated to be only about 40 trillion at a normal P / E ratio.
On June 18, 2010, Carlsberg took some 40.
22 yuan (including the stock market’s optimistic expectation of hepatitis B vaccine success), 23.
8% purchased Chongqing Beer from the state-owned controlling shareholder of Chongqing Beer.
25% equity, the shareholding ratio increased to 29.
Due to the unsuccessful clinical testing of the hepatitis B vaccine, it continued to plummet, falling below Carlsberg’s increase in holding prices and floating losses6.
9.8 billion yuan.
In fact, Carlsberg can purchase Chongqing Beer shares at the level that includes the stock market’s optimistic forecast of the success of the hepatitis B vaccine, but it needs to add a bearish subsidy.
That is, at the beginning, only the future expected discounted earnings of the beer business are paid. It is agreed that if the hepatitis B vaccine is unsuccessful, the future optimistic expected discounted earnings of the hepatitis B vaccine will not be paid.
In addition, Carlsberg can also acquire only the beer business and not the high-risk research hepatitis B vaccine business.
Phased acquisitions, setting up options to increase shareholdings, increase understanding and trust, and maintain scale rather than a one-time acquisition.
At the time of acquisition, one-off payments are not discounted according to the expected future earnings, nor is it a three-year bet. Instead, the acquired profits are used to pay for the purchase.
In addition, listed companies can also increase the transaction structure and resource capacity of their stakeholders during mergers and acquisitions to avoid optimistic assumptions and expectations.
Many companies have difficulty in integration after mergers and acquisitions, and the resources and capabilities they hope to control are lost or duplicated after the acquisitions, indicating that the existing due diligence content and transaction structure design are flawed.
In addition to the current mainstream financial due diligence, tax due diligence, legal due diligence, and business due diligence, corporate stakeholder transaction structures and resource capabilities should be increased, including human resources due diligence.
In the future, the status and scale of human resources will become more prominent and more liquid. The due diligence content and the design of new transaction structures will need to be increased, instead of the traditional due diligence and transaction structure of corporate asset-dependent companies.
The content of due diligence includes: internal and external stakeholders and transaction structure of the acquired company, what are the resources and capabilities of income?
Who owns these resource capabilities?
Or who controls these resource capabilities?
Damage between these resource capabilities?
How will the stakeholders of the company react after the acquisition?
Substitution of the acquirer’s resource capabilities to the acquired enterprise’s resource capabilities?
Synergistic status between resource capabilities?
The actual controller of the acquirer, and the executives need to communicate with the actual controller of the acquired company and members of the operating team, supplementary verification with the due diligence of the intermediary agency, and determine whether there is consensus on the values and business philosophy of the acquired company’s team.Are there any hidden dangers and whether they can be trusted?
According to the results of due diligence, it is clear that the continued operation of the merged and acquired company depends on the supplementary resource capacity: the type of corporate legal person resource capacity dependency?
Human resource capability dependent?
Or two combined types?
Careful assumptions on the business plan after mergers and acquisitions, designing the resource capacity transaction structure, not just the corporate overall transaction structure.
Including transaction methods, payment arrangements, and additional conditions.
For human resource-dependent enterprises, cash + stock payment arrangements are usually required to require the realized shareholder’s controlling shareholder’s shares to realize the purchase of the acquirer’s company’s shares, and issue restricted stocks to the acquirer’s shareholders to undertake high-value acquisitionRisk of failure.
For example, the payment method for Facebook’s acquisition of What’app for $ 19 billion is: $ 12 billion FaceBook stock + $ 4 billion cash + $ 3 billion founder and employee shares.
For investors, it is necessary to treat and estimate the mergers and acquisitions of listed companies with caution. Investors are transaction-oriented. They can manage investment risks by diversifying portfolio investments, but they also bear the risk of overvalued goodwill in mergers and acquisitions.
Practice has shown that M & A has a high risk of achieving expected returns.
Based on this, the European and American stock markets are usually re-reacting to mergers and acquisitions of listed companies.
Therefore, it should not be easy to applaud the mergers and acquisitions of listed companies, especially cross-industry mergers and acquisitions and human resource-dependent light asset companies.
Such enterprises are optimistically forecasting future returns and discounting estimated estimates. After acquisition, the mentality, motivation, and responsibility of the actual controller and management team are likely to change, and key resource capabilities may be lost, increasing the business risks and integration skills of the acquired company.
Investors need one more statement on the overvalued mergers and acquisitions 厦门夜网 of listed companies, multiple statements on the ability of the merged and acquired companies to continue their operations and income growth, and multiple doubts on the ability of listed companies to integrate and merge.
It is necessary to pay attention to the measures and transaction design of listed companies to avoid overestimating mergers and acquisitions, and to be good at responding to or using their feet to cast democracy, just as investors in the shareholders’ meeting in 2018 rejected Gree Electric (000651).
(SZ) The offer of Yinlong Automobile approved by the board of directors.
The author is a professor in the Department of Finance, School of Economics and Management, Tsinghua University