Problems of Huge Goodwill in Merger and Acquisition: Analysis and Solution

Abstract

This paper studies the problems and risks that may exist in the process of high-goodwill mergers and acquisitions. Specifically, taking the event of TONZE ELECTRIC CO.,LTD’s cross-industry M&A of Xintai material in 2016 as an example, the reasons for declined financial performance of the acquired party in 2017 are explored. Through the Analysis, it is proved that the TONZE ELECTRIC CO.,LTD entered the lithium battery field was due to the factors such as weak growth in its main business, huge potential in the lithium battery industry, and emerging cases in high-premium merger and acquisition. The huge amount of goodwill impairment provision which is up to 150 million yuan accrued after this M&A is the main reason for the sharp decline in financial results in 2017. Further analysis reveals that the main reasons for the goodwill impairment provision include the unreasonable strategy before mergers and acquisitions, high amount of goodwill recognized during the merger and acquisition process, and the sudden changes in external environment after TONZE’s merger and acquisition. Finally, we propose relevant countermeasures and suggestions to solve the above problems. This countermeasure is also applicable to other high-goodwill merger and acquisition cases, and has guiding significance for future design of mergers and acquisitions. Keywords—goodwill; mergers and acquisitions; goodwill impairment provision; financial performance