On the evening of December 27, Shanghai Kehua Bio-Engineering Co.Ltd(002022) announced bad news. The subsidiary Tianlong company refused to cooperate with the audit on the grounds that 62% of the equity of Tianlong company held by Shanghai Kehua Bio-Engineering Co.Ltd(002022) was frozen, and the court has ruled to prohibit it from exercising all the shareholders’ rights of this part of equity.
The direct consequence of the loss of control of subsidiaries is the “double killing” of performance and stock price. For example, after Zjbc Information Technology Co.Ltd(000889) lost control of Jiahua information, the company plans to withdraw an asset impairment provision of 1.48 billion yuan, and confirm an investment loss of 287 million yuan, reducing the company’s net profit of about 1.767 billion yuan in 2021. After the news was released, the company’s stock price fell sharply; On December 28, Shanghai Kehua Bio-Engineering Co.Ltd(002022) shares also fell by nearly 9%.
After careful combing, it can be found that most of the out of control subsidiaries come from M & A, and the centripetal force needs to be improved, which is a great test of the ability of listed companies to integrate resources. Therefore, the common practice of listed companies is “high premium M & A + performance gambling”, reaching transactions at a high premium, locking risks with performance gambling and tying the core team of M & A objects. Under such institutional arrangements, listed companies must and must only fully delegate power to the core team of M & A objects, which paves the way for subsidiaries to lose control.
There are many acquisitions of listed companies, and the loss of control of subsidiaries is only a rare phenomenon. The key to triggering this risk is the gambling terms. Gambling includes not only the performance commitments of the original shareholders of the acquisition object, but also the acquisition commitments of listed companies. Once the commitments cannot be fulfilled, disputes will arise. The subsidiaries of Tanac Automation Co.Ltd(300461) and Zjbc Information Technology Co.Ltd(000889) were out of control because their performance did not meet the standard and the original shareholders used various means to refuse to cooperate with the audit work. Shanghai Kehua Bio-Engineering Co.Ltd(002022) after acquiring 62% equity of Tianlong company, it promised to acquire the remaining 38% equity in 2021 at the price of “no more than 900 million yuan or deducting non net profit in 2020” × The higher of “25 times”, but coincidentally, Tianlong’s main product is epidemic prevention materials, and its performance increased explosively in 2020, which led to the price of the remaining 38% equity as high as 10.5 billion yuan. Obviously, it can’t be borne by Shanghai Kehua Bio-Engineering Co.Ltd(002022) with a market value of more than 7 billion yuan. What it can choose is to default or modify the acquisition terms, but this is absolutely unacceptable to the original shareholders of Tianlong company.
The runaway subsidiary of M & A began before M & A. Listed companies have the objective demand to do a good job in performance and expand the market value, but they need to “worry about winning before thinking about losing”. First of all, mergers and acquisitions should consider whether they match their existing resources, whether the merged objects can form strong dependence on themselves, and evaluate whether the subsidiaries can operate normally without the original management team, otherwise it is difficult for the subsidiaries to form centripetal force. Secondly, in the design of gambling terms, we need to focus on the other party’s performance ability. Those who can pay the consideration with shares should try to use shares (or even consider paying by issuing convertible bonds, with specific conditions set for convertible bonds), rather than cash. Finally, for Shanghai Kehua Bio-Engineering Co.Ltd(002022) such cases, an absolute upper limit should be set on the acquisition price to prevent the acquisition commitment from becoming another form of gambling, which eventually evolved into a “black swan” event.
(Daily Economic News)
