The financial risk of M & A and its control

[Paper Keywords] M & A financial incentive to control the causes of the financial risk
[Abstract] mergers and acquisitions is a high-risk business activities, risk throughout the entire M & A activity has always been, where mergers and acquisitions of financial risk is an important factor of success. By the value in the assessment of mergers and acquisitions, financing activities and financial integration systematic analysis of the risk that merger is a high risk of property rights trading activities (among which the most prominent financial risk). Therefore, to use before and after control of financial risk, the application after the controls to mitigate financial risk, thereby improving the survival rate of mergers and acquisitions.

First, the financial risk of M & A
Mergers and acquisitions of financial risk, refers to a period of time, as a result of mergers and acquisition financing or carrying the debt, leaving the company is in financial crisis. Looking at the results from the risk, it does summarize the most M & A core part of financial risk, that is, "caused by the debt financing decision risk." However, sources of risk perspective, the financing decision is not the only reason causing financial risk, as in M ​​& A activities, and decision making related to financial results also include pricing decisions and payment decision-making.

First of all, M & A is an investment behavior, then behavior is a financing, investment and financing decisions jointly affect the financial situation of the enterprise after the merger. Second, M & A is a special kind of investment behavior, from planning and design to the completion of the transaction various value factors can not immediately be reflected on the short-term financial targets, but must go through the integration and operation period, the value of goals can be achieved. Again, the value of M & A target minimum and must not only ensure that no risk on the debt , but to get a scope far exceeds the value of the debt target to achieve added value.

Therefore, if only as a measure of financial risk financing risk criteria, in a sense reduces the value of M & A motives. From the perspective of corporate finance, mergers and acquisitions of financial risk should also include "The acquisition of the financial activities involving enterprises due to the deteriorating financial position or financial results uncertainty of loss. "mergers and acquisitions of financial risks that it refers to the acquisition price, financing, payment and other financial decision-making caused by the deterioration of corporate financial loss or financial results of the uncertainty , so that the expectation value of M & A negative deviation from achieving a result of severe financial distress and financial crisis.

Second, M & A definition of financial risk and its causes
A complete M & A activity usually includes the choice of target companies, target business value assessment, feasibility analysis of mergers and acquisitions, financing acquisitions, bid approach after the determination and integration of acquisitions. And both of these aspects may have risks. financial risk in the process of mergers and acquisitions mainly from the following aspects:
(A) of the acquirer to the target enterprise value of the financial risk arising from the assessment.

M & A based on a target company's valuation, that is, M & A targets through the (equity or assets) by the value judgments, to provide for the acquisition of the bargaining point and basis. Current valuation of the target company is to follow the basic assessment of the assets principles and methods of the estimation procedures, the legitimacy of many factors.

1. Evaluation index system is not perfect. The lack of M & A series of effective evaluation system, the relevant provisions of mostly a matter of principle, interoperability is not strong. M & M influence on human subjectivity, could not by market to implement the Law of value, will inevitably lead to "loss of state assets", or there is loss of state assets in order to avoid over-estimate the value of the target company can not be a result of mergers and acquisitions.

2. Lack of services in mergers and acquisitions intermediary organizations. Due to lack of independent M & A advisory services to provide accurate information and intermediary organizations, so their information can not reduce the cost of acquisition, but also unable to provide guidance and supervision of M & A, increased transaction costs and risks of M & A .

3. Merger too much government intervention. Some local government "arbitrarily arranged", or even an unreasonable price of the deal to force the inferior enterprises into competitive enterprises will eventually be dominant enterprises Tuokua phenomenon. Government intervention is not only the transaction price of a serious deviation from the value returned to the acquiring enormous burden on business.

(B) the acquiring party financial risk financing activities.

1. The impact of different financing methods. M & A financing usually consists of internal financing and external financing. Internal financing resources can be disposed of businesses, funding pressure is small, and need not be repaid, no financing costs, can reduce the financial risk. But only rely on internal financing, will generate new financial risks. the one hand, China's enterprises generally small in scale, profitability is low, relying on its own is difficult to accumulate the funds needed according to plan quickly raised enough, on the other hand, if the extensive use of internal financing, taking the precious liquidity will reduce the external environment and adapt quickly to changes reflect the ability, once the company's own funds for acquisitions, refinancing and difficulties, it will jeopardize the normal operations of enterprises, increase financial risk. external financing, including equity financing and debt financing . equity financing has its limitations: first, the financing requirements of relatively harsh on the stock, the long time-consuming question, is not conducive to seize acquisition opportunities. Second, the equity financing will inevitably change the ownership structure of enterprises, the major shareholder of the company diluted control over, or even possible loss of the acquiring controlling shareholder the right to risk. debt financing relative to equity financing, the cost is lower, but for our country, the first enterprise itself is already very high debt ratio, then the borrower limited capacity, or even borrowing the success of the enterprise after the acquisition of excessive debt, capital structure deteriorated at a disadvantage in the competition. Second, the debt due to debt service, and corporate financial burden heavier, if arranged properly, the enterprises will fall into financial crisis.

2. Financing and M & A motives are compatible. Here, "M & motivation" instrument that holds a combined enterprise intends to temporarily or long-term holders of the target company. If the merger is only a temporary holding company, to be modified due to re-sell them to earn the difference, which requires considerable amount of short-term capital investment to achieve the goal. Then you can choose the relatively low capital cost of short-term borrowing, but the heavy burden of debt service, if the enterprise will arrange properly, will fall into financial crisis. If the target company for long-term holding, it is necessary according to Japanese standard corporate capital structure and the need for continuing operations to determine ways to raise the acquisition of specific funds. So companies should focus on M & A standard length of corporate debt maturity to maintain normal working capital and loan types to match the payback period, reasonable arrangements for capital structure.

(C) of the merger integration of the financial risk.

M & A activity in the enterprise, because of mergers and acquisitions between companies and the target enterprise management concept, organizational structure, management system and financial operation of the different ways in the integration process are bound to be friction, if not properly addressed will not only offset benefits of acquisitions may even erode the competitive advantage of existing enterprises. This is especially the lack of experience and the buyer and the seller side of asymmetric information, the seller can intentionally or unintentionally bite to conceal some very important information to the buyer, and If the buyer is not a full insight into the ability of this, the post-merger integration may have tasted "bitter."
(D) Other sources of financial risk.

M & A risk exists in the system, the inherent risk and operational risk. To develop systems and decision-making purpose is to reduce the uncertainty associated with expected and thus reduce the risk. However, it is because the system is relatively stable, of a long period, once the system inconsistent with the objective Law of development of the risk will have a greater impact. We caused by a system called the system of the financial risk of financial risk.

Corporate financial risk inherent in financial management from the inherent limitations of the information and financial management based on the limitations of both. Financial management as a means of economic discipline and management, which itself has a lot of immaturity, some important financial theory is built on the basis of some assumptions, these assumptions and reality there is a gap, the objective is uncertain economic environment, an estimate made, it can be said of these theories themselves are faced with a certain degree of risk. Meanwhile, the financial management of accounting information as a primary source of information is based on is not perfect, on the basis of certain assumptions can be established is not always the same. Links http://www.hi138.com Research Papers Download Operational Risk is related to financial management personnel during the financial management process because of operational errors or grasp of specific financial measures do not work accurately and errors caused by the financial risk to the enterprise.

Third, the control of mergers and acquisitions of financial risk
(A) the financial risk of the pre-merger control: careful selection of M & A target company.

1. Clear understanding of their strength and position. Enterprises in addition to emphasis on the assessment of the value of target companies, but also should be on their own strength, especially in financial strength analysis and evaluation of an objective to reduce the blind optimism and unrealistic exaggeration of its own power. In addition, should be aware of M & A activity is a strategic behavior, but also a kind of economic behavior, enterprises should follow the principle of the market, not the way to executive order, or to gain political capital, mergers and some of the debt burden of heavy historical burden of redundant or not more than address of the enterprise. leaders should stand for the position of business development, from a rational perspective to decision-making.

2. Reasonable assessment of the target enterprise value. M & A information asymmetry is to generate both business valuation target the root causes of risk, so M & A business should avoid hostile takeover the target company before the acquisition of a thorough review and evaluation. Acquirer can hire investment banks enterprise development strategy based on comprehensive planning, capture the target company and the target company's industry environment, financial condition and operating capabilities to conduct a comprehensive analysis to future earnings capacity of the target company to make a reasonable expectation. On the basis of the valuation made by the target company closer to the target company's true value, helps reduce the risk valuation. In addition, the use of different valuation methods to assess the same target company may have different acquisition prices. M & Company under the M & A motives, whether the target company after the acquisition continue to exist, and have good data and information sufficient to determine whether factors such as the use of appropriate assessment methods. M & A company can also make comprehensive use of pricing models, such as the liquidation value method will be used by the target enterprise value as a lower limit of the acquisition price, cash flow Law established the value of target companies as acquisition price caps, and then under the bargaining negotiations in the area asking price as mergers and acquisitions within the established price.

(B) mergers and acquisitions in the matter of control financial risk.

1. Take a variety of financing instruments. Corporate financing decisions in the formulation should be broad vision, and actively explore various financing channels, so that both inside and outside, to ensure that the target companies are assessed to determine, to the implementation of mergers and acquisitions, restructuring and integration of the smooth progress. At the same time Note that the capital structure of control within a relatively reasonable, both corporate equity capital, equity capital and debt capital and reasonable relationship between the ratio, including debt capital in the short-term debt and long-term debt ratio between the rational and so on, Under this premise, and then the composition and maturity structure of debt capital to analyze the company's future cash flow and debt repayment outflow of portfolio by maturity matching, to identify the company's future liquidity weak point, and then long-term liabilities and short-term term liabilities, the amount of structural adjustment, and strive to minimize the cost of capital.

2. A mixed payment. Enterprises should pay the way of cash, debt and equity and other different combinations. If the acquirer after the merger is expected to get through the effective integration of space for larger profits, you can use a mixture of debt-payment-based payment, the role of the use tax deductible debt, but also can reduce the cost of capital, if the acquirer's own capital adequacy, capital inflows and stable, and the cost of the larger issue of shares or the market value of the stock is undervalued companies, you can choose to own funds based mixed payment, if the poor financial situation of the main and side, balance is high, corporate liquidity is poor, you can take stock swap, in order to optimize the capital structure.

3. M & flexible way to reduce cash expenditures. Main ways: (1) mortgage-style mergers and acquisitions. Will be the acquiring party as collateral to banks for a considerable number of loans for mergers and acquisitions. (2) holding merger bearing debt. When side of the debt acquired mainly from bank loans, and its inability to meet the conditions agreed upon with the bank, by the M & Fang Duli assume the obligations to repay, the bank also allows the transfer of the debt as capital to the share capital of the acquired party in order to achieve the holding position. (3) The M & A bonuses into shares. When the acquired party assets greater than liabilities, the acquiring party does not need to purchase the remaining assets of the acquired party, but by the owner and the acquired party or asset management agencies in consultation the form of people share the remaining assets of the acquired party adding to the acquisition of prescription to go and get points based on the corresponding share of the profits.

(C) after the merger control financial risks.

1. Management of a financial early warning system. M & A business in the integration period, due to financial volatility and greater frequency of occurrence of financial risk, can easily result in acquisition of the financial crisis. Therefore, the M & A business should be timely to establish a scientific management of the financial early warning system, do to take precautions. financial early warning management system is the integration period, the combined enterprise's financial mismanagement and financial processes and the consequent fluctuations in the financial risk and financial crisis as a Research object, and its monitoring, management failures, to ensure that corporate management the sound development of the state. should be the identification, evaluation, prediction, pre-control, and constantly corrects bad financial trends.

2. Corporate spin-off - peel and separate. Divestiture is the company some of its existing subsidiaries, divisions, product lines, fixed assets loaned other companies, and obtain cash or securities in return. Separation is that the company in the subsidiary by the parent company of shares owned, pro rata to existing shareholders of the parent company, which will, in Law and organizations operating subsidiary separate from its parent. In separate process, the cash does not occur transaction, there is no equity and transferred to a third party control of the situation, the existing shareholders of the parent company and subsidiaries also maintain a separation from their rights. unwise business acquisition will have catastrophic consequences, and stripping and separation can help enterprises correct an error of mergers, acquisitions to reduce the financial risk. When the enterprise in the integration process, found the situation to differ from expectations, poor performance of the acquired party or is a loss, the acquiring party bear the burden of interest The stock fell unstable financial situation can be considered a subsidiary or department of such detachment, the separation out. reposted elsewhere in the Research Papers Download http://www.hi138.com