2014 In recent years, numerous well-known Chinese internet companies have gone public in the U.S., making internet enterprises a hot spot in the economy. Against the backdrop of the nation’s economic transformation and its emphasis on energy conservation and environmental protection, internet companies have become a focal point for mergers and acquisitions among many firms—especially publicly listed companies. Internet company M&A deals have been... 2010 It has gradually increased since the beginning of the year, 2014 Year, internet company M&A deals from 2013 The year's first 13 Rise to No. 6 The number is showing a trend of exponential growth, and in... 2015 The first half of the year continued to show a growth trend.

     Valuing M&A deals in internet companies is challenging.

     Currently, the number of valuation firms involved in M&A transactions for internet companies has been increasing year by year; however, their share in valuing internet companies remains relatively low. Meanwhile, when it comes to valuing internet companies, valuation firms predominantly base their final conclusions on results derived from the income approach—until... 2015 Only recently has the market approach been used as the final valuation conclusion, while the asset-based approach is rarely adopted as the final valuation conclusion.

     Further analysis 2010 Year to 2015 Year 6 From the internet enterprise M&A valuation reports issued by various institutions each month, it can be seen that the valuation targets are predominantly internet enterprises in the growth stage, with relatively clear forecasts of future earnings. In contrast, there are fewer valuations for internet enterprises in the startup and early stages.

     The reason for this is that the internet industry is an emerging sector characterized by frequent innovation in business models. Companies in this sector have short growth cycles and undergo rapid changes. Most internet companies exhibit weak profitability with significant fluctuations. Growing internet enterprises often have relatively low profitability but extremely high price-to-earnings ratios, making it difficult to value these companies and thus limiting the involvement of valuation firms in merger and acquisition transactions involving internet companies. Moreover, state-owned enterprises and publicly listed companies tend to participate less frequently in mergers and reorganizations of internet companies, lacking legally mandated valuation requirements, which results in greater autonomy in pricing during such transactions.

     Internet company valuations require a willingness to innovate.

     Currently, Chinese internet companies have become a hot spot in China’s M&A market. In this year’s Government Work Report, Premier Li Keqiang proposed formulating an “Internet Plus” action plan, further promoting the integration of traditional industries with the internet.

     Faced with the explosive growth of mergers and acquisitions in the internet sector and the increasing demand for internet company valuations, the current internet valuation system remains immature. Valuing early-stage and nascent internet companies is still in the exploratory phase. Moreover, the continuous innovation in internet business models makes it extremely challenging to accurately value internet companies today. Only by continually exploring and innovating valuation methodologies can valuation firms and regulators gain a competitive edge in providing M&A services for internet companies and keep pace with evolving market demands.

     Valuation agencies are constantly innovating in practice. The internet represents a revolution that all of human society is collectively facing. Many internet companies have had such profound impacts on real society that even they themselves cannot predict these effects. As a result, it is extremely difficult to forecast both the amount and duration of cash flows generated by internet companies. Therefore, valuation based on discounted cash flow... DCF ) Model-based valuation of internet companies may be more prone to “precise errors,” whereas market valuations based on comparability—such as the price-to-earnings ratio—( P/E ) and the price-to-book ratio ( P/B The evaluation results generated by methods such as these may tend toward “vaguely correct.” In recent years, valuation agencies have continuously summarized their experiences and relentlessly innovated in the practice of valuing internet companies, essentially establishing a variety of mature valuation methodologies for internet enterprises.

     Case 1: China National Publications & Media Corporation’s acquisition of Beijing Zhiming Xingtong Technology Co., Ltd. 100% For this equity transaction, the valuation firm employed both the income approach and the market approach for the assessment, ultimately adopting the results from the income approach as the final valuation outcome. A key highlight of this case is that the valuation firm recognized that the value of gaming platforms is determined by factors such as the number of users, user stickiness, and monetization potential, and on this basis, made a well-reasoned projection of ZhiXingMingTong’s future prospects. 5 Annual gaming business revenue forecast.

     The forecast method for ZhiXingMingTong’s gaming business revenue is as follows: The key operational parameters of gaming products include the number of paying users and the average monthly spending per paying player. ARPPU Value) and the game lifecycle.

     Game top-up = Game revenue = Number of paying users × ARPPU Value ( A ) Number of paying users = The number of active users multiplied by the payment rate yields the number of paying users—the core consumer group for the game. After the game’s launch, this group experiences rapid growth during the testing and early growth phases. As the user base expands, the number of paying users increases, gradually pushing the game’s revenue to its peak. Thereafter, the game continues to be promoted based on the user base that can sustain this peak revenue level, ensuring relatively stable income throughout the game’s lifecycle—and beyond.      As the number of promotional users declines and the number of paying users gradually decreases, the game enters a period of decline, with revenue starting to drop steadily and eventually leading to its discontinuation.

     Taking monthly data as an example, the calculation formula is as follows: Monthly number of paying users. = Monthly Active Users × Paid Conversion Rate: Monthly Active Users refer to game users who log in at least once per month.

     Monthly active users = Last month's non-new active user retention + Monthly retention of new users from last month + Total number of newly registered users this month / Total number of registered users = Number of registered users last month + Monthly New Registered Users’ Payment Rate: The payment rate is the ratio of actual paying users to active users. Payment rate = Paid user / Active users.

     ( B ) ARPPU Value ARPPU It refers to the average spending level per paying user, which typically varies depending on the consumption habits of the platform on which the game is released. ARPPU The values are also different. ARPPU The value remains largely stable throughout the lifecycle, but later declines as the number of paying users decreases. ARPPU The values differ slightly.

     ( C ) The game lifecycle is characterized by a life cycle that typically goes through four stages: the testing phase, the growth phase, the maturity phase, and the decline phase.

a. Testing Period: The initial stage in which players become familiar with online games.

b. Growth Phase: This is a critical stage where players become familiar with online games.

c. Maturity: The stage at which players are fully engaged with the online game—and also the longest phase in the game’s lifecycle.

d. Downturn: The period when players become tired of online games, during which they completely leave the game world.

     Through a reasonable analysis of the game lifecycle, it has been determined that the typical lifecycle of self-developed and operated games is... 5 Around the year, the typical lifecycle of games operated by agents is... 3 Around the year.

     Case 2: Taiya Footwear Co., Ltd. Acquires Shanghai Kaiying Network Technology Co., Ltd. 100% The equity in this transaction was evaluated using both the income approach and the market approach, with the valuation result from the market approach serving as the final assessment outcome. The highlight of this case lies in the use of the market approach for pricing, and specifically in the adoption of: PE Indicators, and through PEG The indicator has been revised.

     The basic formula for equity value is:

P = Pb/Eb × ( A × B × C × D × F × G ) × E+I

Among them: P — Operating equity value of Kaiying Network Pb — Comparable company’s operating equity value; Eb — Comparable company’s first-year net profit; A — Expected growth rate adjustment factor; B — Vendor background coefficient; C — Market and Channel Coefficient; D — Theme and Gameplay Coefficient; F — Game quality coefficient; G — Operating data coefficient; And E — Kaiying Network’s first-year net profit; I —In the valuation practice of internet companies, innovative methods such as the user-value approach and the entry-point value method have also emerged for surplus assets and liabilities. 1. The user value method’s formula is: V=K × P × N squared over R squared Among them, V is the value of internet enterprises, K It's the monetization factor, P It is the premium rate coefficient (which depends on the company’s position in the industry), N is the number of internet users, R It is the distance between network nodes.

    2. The input value method's formula is: V=M × N × (X+Y) Among them, V It is the value of internet enterprises; M It's the inbound traffic, N It's entry-level quality, X is the viscosity coefficient, Y The aggregation coefficient assessment methodology—covering internet enterprises’ perceptions of their business models, quantifying the determinants of enterprise value, and establishing valuation models—not only effectively addresses the current demand for valuing internet companies but also introduces innovative approaches to valuing such enterprises. These methods are not only well-suited for internet companies but also significantly enrich the valuation methodologies applicable to traditional industry enterprises. For instance, the valuation model illustrated in Case Study 2 can be extended and applied to the valuation of banks, securities firms, and other similar entities.

     Case Three: 2015 Year 7 Moon 31 On [date], the M&A Restructuring Committee of the China Securities Regulatory Commission approved Youzu Network Co., Ltd.'s acquisition of Guangzhou Zhangtao Network Technology Co., Ltd. (hereinafter referred to as “Zhangtao Technology”). 100% The equity project, Zhangtao Technology, was founded. 2012 Year 9 Month, registered capital 10 Ten thousand yuan. Since its establishment, the company has consistently focused on research in the mobile internet and is committed to providing high-quality services for mobile developers. As of the valuation benchmark date... 2014 Year 12 Moon 31 On that day, the book value of Zhangtao Technology’s total assets was 1,455.87 Ten thousand yuan, with a book value of liabilities at 101.47 Ten thousand yuan; the book value of total shareholders’ equity is 1,354.40 Ten thousand yuan.

    2013 Annual, 2014 The annual unrealized operating revenue and net profit were: -566.03 Ten thousand yuan, -1,045.04 Ten thousand yuan. The valuation agency used the income approach to estimate the investment value of all equity interests held by the shareholders of Zhangtao Technology as of the valuation base date. After valuing using the income approach, the investment value of all equity interests held by the company’s shareholders is: 53,813.45 Ten thousand yuan. The assessed value has increased compared to the book value. 38 Twice.

     The valuation characteristics of this project involve valuing internet enterprises that have been established recently, have no revenue yet, and are in the early stages of development. Moreover, the valuation firm employed only one valuation method—the discounted cash flow model based on earnings—thus breaking through the regulatory restriction under Article 20 of the “Administrative Measures for Major Asset Restructuring of Listed Companies,” which stipulates that valuation firms should, in principle, adopt two or more methods for assessment or valuation. At the same time, the valuation firm selected an investment value type corresponding to the synergistic benefits generated from the integration of resources between the acquiring and acquired companies.

     The valuation of Zhangtao Technology continues to be highly controversial in many aspects. However, regulators have dared to break through regulatory constraints in reviewing valuation reports and have endorsed the types of value and assessment methods employed by the firm. This has played a positive role in encouraging valuation agencies to participate more actively in valuing early-stage and young internet enterprises, thereby promoting their further involvement in providing valuation services for such companies. (This article was compiled by our reporter Liu Antian.)