The Financial Risk of Internet Enterprise on Mergers amp; Acquisitions—Based on the Case Analysis of Merger amp; Acquisition of Lionmobi by Soonyo Technology Co., Ltd

Xiaolin Jin

Shanghai Lixin University of Accounting and Finance, Shanghai 200235, China

Abstract: Financial integration proves more difficulty after cross-border mergers and acquisitions (Mamp;A), which may trigger financial risks and merger failure. In recent years, there are more mergers and acquisitions of Internet enterprises in Chinarsquo;s capital market. Due to the risks of mergers and acquisitions, many mergers and acquisitions, after playing the role of hyping stock prices in the short term, are possibly to cause large goodwill impairment and damage the interests of investors. Therefore, in addition to focusing on the motivation and performance of mergers and acquisitions of listed companies, in-depth analysis is also required from the perspective of finance to investigate the financial integration of Internet enterprises after cross-border mergers and acquisitions.

Keywords: Cross-border Mamp;A, Valuation bubble, Goodwill impairment, Financial integration, Financial risk.

Introduction

According to the international well-known consulting firm McKinsey, it was found that over the past 10 years, Mamp;A activity by Chinese companies has not been satisfactory, with 60 per cent of cases producing no real value for the acquirer, which involves the amount of $300 billion. It shows the inadequate theory and practical experience of Mamp;A of Chinese enterprises, so that the risks of Mamp;A far outweigh the benefits. According to the Wind database, a total of 2,547 Mamp;A took place in A-shares from 2018 to 2020. Some enterprises successfully integrated financial resources after mergers and acquisitions, but Mamp;A subjects failed to be improved in the long-term financial performance because of mergers and acquisitions. For example, listed companies such as Zeus Entertainment and Leibo Technology experienced financial performance changes after several years of mergers and acquisitions. It shows poor financial performance of Mamp;A, which makes the financial risk of Mamp;A become the research topic of this paper.

Event Briefing

Soonyo Technology Co., Ltd is a listed company in the field of online games in Chinarsquo;s growth enterprise market in 2015. Lionmobi, founded on May 8, 2014, is a mobile phone system software development enterprise. It has been developing a number of mobile phone system applications for overseas countries for a long time. Since 2016, Soonyo Technology Co., Ltd began to gradually promote the business layout of mobile terminals. Therefore, during January 2017, a Major Notice on Suspension of Asset Restructuring was issued, which publicly announced the arrangement plan of the acquisition of Lionmobi. During the merger and acquisition process. After consultation and negotiation between the two companies, the company introduced a number of third parties to acquire the company. Finally, in July 2017, the company passed the proposal of issuing shares and paying cash to jointly acquire the company, and in September of the same year, the company

passed the preliminary audit of China Securities Regulatory Commission. In the proposal on September 20 of the same year, it decided to pay the consideration of the merger with 12.037% cash and 87.963% shares, which was submitted to the CSRC for final examination and approved the transaction in November of the same year. Finally, On November 22, 2017, Soonyo Technology Co., Ltd completed the acquisition of Lionmobi.

In this transaction, the total amount of consideration paid stands at 2.7 billion yuan, and the acquisition party is composed of 28 shareholders, which mainly come from shareholders of Soonyo Technology Co., Ltd. Among them, Soonyo Technology Co., Ltd utilizes 2.375 billion yuan of stock and 325 million yuan of cash payment consideration, Soonyo Technology Co., Ltd uses 39.58 Yuan/share to issue

647.296 million shares to complete the payment, including 6,0050,549 shares to Lionmobi shareholders. In terms of cash, it issued ordinary shares to shareholders of the partner in a non-public inquiry way, raising 686 million Yuan in cash to complete the payment.

Identification and Measurement of Financial Risks in the Acquisition of Lionmobi by Soonyo Technology Co., Ltd

Identification of Financial Risks

• • 1. Risks caused by overvaluation

In the valuation of Lionmobi, the third-party evaluation of Soonyo Technology Co., Ltd is as high as 27784962 million yuan, but the companyrsquo;s net profit from 2014 to 2015 were in the red, an net profit in 2015 was -2703338 million yuan. The net profit in 2016 turn losses into gains, reaching 124,0947 million yuan with drastic growth. The authenticity of its statements is questionable risk. At the end of 2016, the net book value of Lionmobi was only 250 million yuan, and the premium rate of Mamp;A value reached 1014.79%. The merger

and acquisition of Soonyo Technology Co., Ltd generated goodwill of 2,341,756,100 yuan, accounting for 67.21% of the total assets in the year. In fact, this merger is characterized with a high valuation risk, because the development environment of overseas mobile Internet applications is highly uncertain, so it is impossible to judge whether Lionmobi can maintain strong growth capacity and competitive position after 2017. If the actual value of Lionmobi is not as high as the valuation level of income method. Large impairment of goodwill can be caused by Soonyo Technology Co., Ltd with serious asset shrinkage, which lead to a huge net profit loss.

• • 1. Risks arising from Mamp;A financing

In the merger and acquisition, Soonyo T

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