M&A transactions often struggle to find a perfect deal solution, only the optimal solution that balances the interests of all parties as much as possible. This is because M&A transactions involve multiple parties and institutions, including regulators, listed companies and their shareholders, the management of both parties, target companies, creditors, employees, local governments, etc. Therefore, an excellent transaction plan should do the following two things: one is to clearly demonstrate the needs of all parties to the transaction, and the other is to be able to solve the concerns of all parties to the transaction. Only in this way can the plan take into account the interests of all parties, dispel the doubts of all parties, and facilitate the smooth progress of the M&A transaction.

Depending on the needs of the parties to the transaction, the transaction planner will adjust the transaction structure. For example, when the seller prefers cash, the transaction should be arranged for cash payment whenever possible; When the buyer believes that the underlying asset may be risky in the future, it can consider the method of paying in installments or spreading the purchase. For the various issues of concern to the parties to the transaction, the transaction planner will also propose solutions accordingly. For example, when there is a disagreement between the parties to the transaction on the transaction price and the profitability of the underlying asset, the transaction planner can add a VAM clause to the transaction structure; When the buyer is worried about the loss of core personnel of the underlying asset after the transaction is completed, the transaction planner can add the severance compensation clause and the non-compete clause of the core personnel.

From design to implementation, in addition to meeting the above two requirements, an M&A transaction plan must also pass the review of the stock exchange or the China Securities Regulatory Commission when it constitutes a major asset restructuring. As a result, striking a balance between compliance and commercial interests has become a key focus in the design of the deal and is at the heart of the M&A deal. Obviously, achieving this balance requires a lot of information and resources, which is the value of securities firms and investment banks.

Next, we explain how to design an M&A transaction plan from four aspects: valuation and pricing determination, payment method arrangement, performance commitment and compensation arrangement, and financing plan design.

For an M&A transaction, valuation pricing is fundamental. Valuation pricing involves many aspects such as valuation basis, evaluation method and intention negotiation, which are introduced as follows.

The first is the basis for valuation. According to the current measures for the management of major asset restructuring, the valuation basis of the underlying assets can be obtained from two ways, namely asset appraisal institutions and valuation agencies. An asset appraisal agency with securities practice qualifications may issue an asset appraisal conclusion, and a valuation agency may issue a valuation report. Since the former is subject to the Asset Appraisal Law and related industry standards, it is relatively easier to be recognized by the regulatory authorities and the market, so it occupies a mainstream position in the market.

The second is the assessment method. At present, there are three common valuation methods: asset base method, income method and market method. Because the vast majority of industrial M&A transactions are for-profit assets, the income method is the most widely used valuation method. In addition, the market method is also relatively common, which can be subdivided into the comparable transaction method and the comparable company method, which is mostly used in mature markets, and the use rate in the A-share market is gradually increasing.

Finally, there is the intent-to-act negotiation phase. At this stage, most of the two parties use the P/E valuation method to negotiate and reach a consensus, which is a type of market method. The transaction negotiation between the two parties involves a number of aspects, such as the listed company's share price, the proposed issue price, the projected profit, the development prospect of the industry in which it is located, the growth rate and the design of the plan. Through the negotiation of the two parties to reach a consensus, the final result of the negotiation is obtained, which shows that the valuation in the M&A transaction is not the result of the role of a single party, but the comprehensive result of multiple trade-offs.

Next, we analyze the influencing factors of valuation from three levels: target company, listed company, and scheme design.

◆ At the level of the target company

For the target company, the factors that have a significant impact on the valuation include the development prospects of the industry to which it belongs, the profit forecast, and the performance growth rate. As mentioned above, the parties to the transaction will make a preliminary valuation of the target company based on the P/E ratio, which can be divided into static P/E ratio and dynamic P/E ratio. The dynamic P/E ratio is mostly used in situations where the market situation is optimistic or the asset is in a seller's market, such as companies engaged in emerging businesses, Internet companies, and companies in the explosive period of performance growth.

High valuations need to be supported by high performance growth rates, and there is a certain matching relationship between performance growth rates and price-earnings ratios. When the growth rate is around 20%, the P/E multiple is about 8 to 10 times; When the growth rate is around 25%, the P/E multiple is about 10 to 12 times; When the growth rate is around 30%, the P/E multiple is around 12 to 15 times. It can be seen that the growth rate valuation method is also a simple and effective valuation method.

In addition to the performance growth rate and earnings forecast, the business model and development prospects of the company's industry, and the development stage of the company will affect the final valuation. In some cases, the company will value the target company multiple times at different points depending on the progress of the payment.

◆ At the level of listed companies

From the perspective of listed companies, when using share-based payment or hybrid payment as a payment method, the stock price of the listed company and its reasonableness, as well as the share issue price proposed by both parties, will affect the valuation of the target company. This is because under this payment method, the shareholders of the target company receive the newly issued shares of the listed company in the transaction, and if the stock price level of the new issue and the proposed issuance of the listed company is not considered, the valuation obtained will be very one-sided if only the valuation of the target company is considered.

◆ Scheme design level

At the scheme design level, transaction structures such as payment methods, VAM arrangements, and lock-up period arrangements will affect the final valuation, because the risks and benefits of a transaction are often equal. In actual transactions, the use of cash as a payment method will make the valuation of the company lower than the share price payment, the absence of a VAM arrangement will make the valuation of the company lower than that of a VAM arrangement, and similarly, the short lock-up period will also make the company's valuation lower than the situation with a long lock-up period. In addition, the cost of taxes will also have an impact on valuations to some extent. All in all, the process of valuing the target company is very complex, including not only the evaluation of the target company by the listed company, the game between the two parties, but also the recognition of the market and regulators. Unreasonable valuations can face disapproval from the market and regulators, and can even jeopardize a company's performance. Therefore, a reasonable valuation should maximize the interests of all parties and constitute the optimal solution of the transaction plan.