After the market closed last Friday, the regulatory authorities issued a document that did not attract much attention, called the Management Measures for Major Asset Restructuring of Listed Companies, which unbinds future mergers and acquisitions with four 'firsts', marking a significant reform.
First, it introduces a simplified review process, allowing qualifying transactions to be completed in 5 trading days. The attitude is clear: encouraging mergers and acquisitions.
Secondly, it allows installment payments for acquisition amounts, extending the registration validity period from 12 months to 48 months, significantly reducing the pressure on corporate acquisitions; this effectively increases the leverage in the merger and acquisition process.
Third, it relaxes restrictions on financial indicators and inter-industry competition, allowing acquisitions of unprofitable technology companies; this clearly directs more mergers and acquisitions into the technology sector, constituting a major benefit for the tech growth industry.
Fourth, for the first time, it introduces a 'reverse link' for private equity funds, directly halving the locking period for investments held for 48 months, greatly enhancing exit efficiency. This encourages private equity funds to participate, achieving linkage between the primary and secondary markets, thereby expanding the scope of mergers and acquisitions.
So what is the significance of mergers and acquisitions? Why is it said to be a key factor in a bull market?
First, it addresses the performance issues. The reason why A-shares aren't rising is because, despite a recovery, there is no slope; the performance of listed companies is flat on the ground, and without performance growth, if stock prices are to rise, it all depends on valuation adjustments. However, the current monetary environment and economic fundamentals do not support a significant increase in market valuations, leading to a very complicated market rise. It takes three steps forward and two steps back, and since reaching the hurdle on October 8 last year, it hasn't been able to get past it. After the valuation repair of the primary rocket and the logic of policy game play have been completed, there has been no way to switch to the performance-driven logic of the secondary rocket. Hence, the secondary rocket cannot take off. Mergers and acquisitions can solve this major dilemma. We all know that performance mainly arises in two ways: one is endogenous, doing everything ourselves, similar to farming, accumulating bit by bit, but this growth model is very slow. The other is the external merger model, more common in the tech growth sector, which involves acquiring good business segments quickly to directly increase performance. For example, a company with a 20x valuation in the stock market sees another company that can generate 100 million in net profit annually; it can spend 1 billion to acquire it, instantly increasing its own performance by 100 million in the capital market and bringing about a 2 billion increase in market value. It's equivalent to spending 1 billion to gain 2 billion. Then it can repeat this process, leading to continuous performance growth. The TMT boom from 2014-2015 relied on this external merger model, allowing many companies to achieve doubling or even multiple increases in growth. The ChiNext Index rose by 6-7 times, so with high and sustainable performance growth, valuation becomes less important. Market risk appetite will noticeably increase, following the Davis double-hit logic of the secondary rocket, elevating both performance and valuation. Just imagine if performance increases by 20% and valuation also rises by 20%, then market prices will increase by 44%. This will result in very exciting market performance.
Secondly, it addresses the issue of insufficient domestic economic demand. The current economic bottleneck lies in domestic demand, which includes consumption, but an even more critical factor is entrepreneurship; nothing is profitable, so capital is stagnant. Since 2022, we have rarely heard exciting investment news from the primary market, nor have we seen any notable unicorn companies emerge. With capital stagnant, wealthy individuals are not starting businesses, and ordinary people cannot find employment, leading to poor income expectations, which in turn affects consumption and asset prices. To break this negative cycle, it is essential to resolve the linkage between the primary and secondary markets, allowing capital to become profitable so that it invests more. This will lower the risks of entrepreneurship; with more entrepreneurship, income expectations will rise, and domestic demand will increase. The purpose of mergers and acquisitions is to enable listed companies to become effective capital, using valuation discrepancies to address the sluggishness of the primary market. As long as I make profits, the listed company can acquire me, and then I can cash out in the market. More stories of wealth creation will emerge, thereby forming a virtuous cycle of venture capital.
Third, it promotes technological innovation and further strengthens domestic substitution, pursuing high-quality development. This management measure allows technology companies to not even need to be profitable, which is a clear green light, straightforwardly encouraging technology. It aims to invigorate grassroots technological forces and incorporate quality assets and excellent technologies into the capital market. Using capital to safeguard technology significantly increases the likelihood and probability of technological breakthroughs.
So this is a triple win situation, addressing insufficient domestic demand, poor performance, and also promoting technological innovation and high-quality development. In fact, we have long said that the most important step in capital market reform is to advance major asset restructuring. Because this is what the policy most wants to achieve: to let finance nourish the real economy, allow capital to drive technology, thus achieving a sustained increase in comprehensive national strength. We are very confident that a long bull market with a 10-year period and 3 times growth has already begun to slowly take off.