On the one hand, the tightening of review has caused many NEEQ companies to terminate their IPOs on their own initiative; on the other hand, many listed companies want to expand new businesses and improve the industrial chain through mergers and acquisitions. Both sides get what they need, which has led to an increase in the number of A-share companies "marrying" NEEQ companies since this year.

Industry insiders pointed out that the current NEEQ market is sluggish and the valuations of listed companies are low, which is a good time for listed companies to buy at the bottom. The NEEQ market brings together a large number of innovative small and medium-sized enterprises, which is conducive to listed companies selecting high-quality M&A targets. For NEEQ companies, the increase in M&A is conducive to the market's re-understanding of their valuations.

M&A heat increases

Statistical data show that as of June 25, this year, A-share listed companies have issued 19 plans for mergers and acquisitions of NEEQ companies. Excluding cases where the transaction price was not announced, the total transaction amount involved reached 10.286 billion yuan.

Zhang Chi, chairman of Xinding Capital, told a reporter from China Securities Journal that the rise in the A-share listed companies' mergers and acquisitions of NEEQ companies is mainly due to the tightening of IPO review and the market environment. First, listed companies can increase profits by acquiring high-quality NEEQ companies. The NEEQ market brings together many high-quality NEEQ companies, each with its own characteristics, and many NEEQ companies have advantages in niche areas. For listed companies, it is easy to find high-quality acquisition targets in the NEEQ market. Secondly, the current NEEQ market is at a low point, and the valuations of many NEEQ companies are much lower than in previous years, which is the right time to buy at the bottom. From the perspective of the NEEQ market-making index, on June 25, the NEEQ market-making index closed at 846.09, which fell to less than 30% compared with the high of 2673.17 in April 2015.

Zhang Chi further pointed out that the difficulty of IPO has increased since this year, and some NEEQ companies have turned to seek acquisitions as they see no hope of IPO. As of June 25, 57 companies have passed IPO review this year. The number was 219 in the same period last year.

From the perspective of industry conditions, NEEQ companies in emerging industries such as high-end manufacturing, intelligent robots, the Internet, and information industries are favored by listed companies. Taking the acquisition of Granbo by Huayi Compressor of the "Changhong Group" as an example, Huayi Compressor pointed out in the acquisition plan that the acquisition was mainly due to its optimism about Granbo's future business development, its advantages in smart home robots and its team, and its efforts to build the smart home sector of Huayi Compressor's subsidiaries and expand its business areas. According to information, Granbo is mainly engaged in the research and development and manufacturing of smart robots and new energy battery products.

In February of this year, the listed company Longsheng Technology announced that it plans to acquire 100% of the equity of Weiyan Precision. Weiyan Precision is a high-tech enterprise in precision manufacturing, focusing on the research and development and production of precision molds, high-end precision stamping parts, high-precision machined parts, precision injection molded parts and other products. Longsheng Technology pointed out that Weiyan Precision is an upstream enterprise of the listed company. This transaction is conducive to the listed company to ensure sufficient supply of raw materials and stable prices. After the transaction is completed, the company will complete its business layout in the upstream industry.

"Some companies, especially some small-cap companies, are facing difficulties in their traditional main business operations and need to expand in related new industries. Through mergers and acquisitions, they can improve their upstream and downstream business layout. The New Third Board concentrates a large number of innovative small and medium-sized enterprises, and there are nearly 3,000 companies with profits of more than 20 million yuan, and most of them are concentrated in emerging industries." Zhu Haibin, chief analyst of the New Third Board of Essence Securities, told a reporter from China Securities Journal, "For the New Third Board, being acquired by a listed company can also improve the corresponding valuation."

Industry insiders pointed out that both sides get what they need, which drives the rise in the popularity of mergers and acquisitions. Listed companies hope to seek new breakthroughs and strength points for their businesses through mergers and acquisitions, while New Third Board companies can "go ashore" smoothly through mergers and acquisitions. From the current situation, the number of failed cases of A-share companies "marrying" New Third Board companies has decreased, and the success rate of mergers and acquisitions has increased. According to the Choice data of Oriental Fortune, as of June 25, there were 8 merger termination announcements this year, accounting for 8.99% of the total number of merger announcements; while there were 9 in the same period last year, accounting for 15%.

Valuation and payment methods are key

Many mergers and acquisitions involve the transfer of control, and the negotiation process is relatively long, and there are many examples of failed negotiations. Zhu Haibin analyzed that the core differences in the failure of mergers and acquisitions often arise in terms of transaction price and payment method.

Take the Zhongzhu Medical acquisition case as an example. On April 27 this year, Zhongzhu Medical issued a restructuring plan. The company plans to purchase 74.53% of Kangze Pharmaceutical's shares in cash, with an estimated price range of 1.833 billion yuan to 2.012 billion yuan. On June 21, Zhongzhu Medical announced that the company decided to terminate the acquisition of Kangze Pharmaceutical because the two parties failed to reach an agreement on core terms such as target valuation and performance commitments, and the financial advisor estimated that it would take too long to re-issue the verification opinion.

Kane shares intends to acquire 87.58% of the equity of Zhuoneng New Energy Co., Ltd. and raise supporting funds. However, since the two parties to the transaction are expected to be unable to reach a consensus on the asset valuation and pricing plan adjustment of the target company within the time limit prescribed by laws and regulations, it is proposed to terminate this major asset restructuring after consultation.

Some NEEQ companies have many shareholders and different understandings of valuation, which has become an important factor in the failure of mergers and acquisitions. Tianhong Laser, a star company on the NEEQ, is such a case. On March 22 this year, Farsen issued an announcement that it plans to acquire 100% of Tianhong Laser's equity. As of March 31, 2018, Tianhong Laser had as many as 409 shareholders, with serious equity dispersion. On May 24, Farsen said that due to the large number of shareholders of the transaction target, it was impossible to reach a consensus with the shareholders on the core transaction terms such as the transaction price, performance commitment and compensation method, and consideration payment method in the short term, and decided to terminate the matter.

Industry insiders pointed out that the current NEEQ market is sluggish, and many shareholders of NEEQ companies are introduced from the secondary market. The time point of stock purchase is different, and the corresponding holding costs and understanding of company valuation are also different. Some investors have too high holding costs and are unwilling to compromise, so it is difficult to reach a consensus on the transaction consideration.

Zhu Haibin believes that differences in payment methods are also a major factor leading to the failure of mergers and acquisitions. There are usually two payment methods. The first is cash. When listed companies have sufficient funds or the scale of the acquired companies is small, cash transactions are generally chosen. In this case, the valuation of the target company must be at least higher than the secondary market transaction price of the NEEQ companies. The second method is to issue additional shares through private placement, and sometimes pay part of the cash. This method needs to be approved by the China Securities Regulatory Commission, and there are some restrictions on the industry, price-earnings ratio, and performance commitments of the target company.

Rational view of the concept of mergers and acquisitions

Zhu Haibin pointed out that the impact of the failure of merger and acquisition expectations on both parties is not the same. For NEEQ companies, due to inactive transactions, the stock price is relatively less affected.

However, during the negotiation of mergers and acquisitions, the suspension of NEEQ companies consumed time costs and human and material resources. Therefore, how to identify listed companies and choose reliable counterparties has become an issue that needs to be considered when NEEQ companies acquire companies. Zhu Haibin suggested that companies should try to select listed companies with large market capitalization and can form synergy in business. In terms of payment methods, try to negotiate acquisitions through cash. The private placement method requires approval at all levels, and there is a lot of uncertainty.

Zhang Chi pointed out that the rise in mergers and acquisitions is conducive to the market's re-understanding of the valuation of NEEQ companies. "But a good merger and acquisition market does not mean that the risk of speculation is small." For listed companies, mergers and acquisitions are major events. In order to avoid abnormal stock price movements, companies may issue a suspension announcement at the beginning of negotiations. If the merger and acquisition involves matters such as the transfer of control, the negotiation process may be difficult and long, and it is normal that the merger and acquisition fails in the end.

On May 4, Mengzhou Co., Ltd. announced that it would acquire 94.4% of the equity of Vanya Culture at a transaction price of 415 million yuan. Among them, it plans to pay 234 million yuan by issuing shares and 181 million yuan in cash. On June 1, Mengzhou Co., Ltd. announced the termination of the merger and acquisition plan. After repeated negotiations between the parties to the transaction, the company and the counterparty still could not reach an agreement on some key issues. Mengzhou Co., Ltd. resumed trading on June 5, and its share price plummeted by 8.54%. It continued to fall in the following four trading days, with declines of 1.38%, 1.05%, 3.55% and 5.88% respectively.

Data provided by Essence Securities shows that the valuation mismatch of the market where the NEEQ companies are located cannot change the nature of high-quality companies. Due to insufficient liquidity, about 11% of the companies in the current market are in a value "lowland". Valuation mismatch will bring investment opportunities.

Zhang Chi pointed out that the basic logic of NEEQ investment is value investment, carefully analyzing the industry, exploring high-quality companies, intervening in advance and earning a premium for corporate growth. The market downturn is also a time to explore high-quality targets. (Intern reporter Huang Lingling)

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