Research On The Application Of Directional Convertible Bonds In M&A Of Chinese Enterprises

Mergers and acquisitions(M&A)is one of the commonly used means for the extension development of enterprises.It has officially emerged in China since 1984.After nearly 40 years of development,the number of annual transactions has gradually increased,the scale of single transaction has gradually expanded,and the requirements for the cash flow level of enterprises have become higher and higher.At the same time,since 1992,the first convertible bond in China was issued on a pilot basis.As an important means of financing for enterprises,it has been favored by more and more enterprises and investors for its flexible terms,dual attributes of creditor’s rights and equity rights.In November 2018,the CSRC issued the document "CSRC Pilot Targeted Convertible Bond M&A to Support the Development of Listed Companies".Since then,listed companies such as Secote Co.,Ltd,King-Strong Co.,Ltd,China Eagle Electronic Co.,Ltd Electronics and Leike Defense have successively issued M&A transaction plans,and targeted convertible bonds have been used as one of M&A payment methods.By December 31 st,2021,a total of 37 listed companies had issued M&A transaction plans and applied directional convertible bonds,among which 20 listed companies had completed M&A.Therefore,the research direction of this paper closely follows the latest trends of China’s capital market,and analyzes the application of directional convertible bonds as a payment tool in China through the selection of typical cases,which is innovative in theory and practice.Firstly,this paper introduces the current situation of China’s M&A market and directional convertible bond payment instruments,and combs the domestic and foreign literature related to M&A payment methods,convertible bond issuance motivation and the internal and external influence of convertible bond issuance on enterprises.Then in the second chapter,it introduces the theoretical basis including trench theory,back door equity hypothesis,etc.,and theoretically analyzes the issue motivation,advantages and risks of directional convertible bonds.The third chapter carries out macro-level industry analysis,including the development history and present situation of directional convertible bonds and M&A market;The fourth chapter introduces the case,first of all,the basic situation of both parties of M&A,including the historical development,main business and operating data of Leike Defence and Hengda Microwave,and combs the process of this acquisition according to the time axis,analyzes the payment scheme and specific terms of this directional convertible bond,and on this basis,analyzes and draws the following conclusions:(1)Leike Defence regards directional convertible bond as one of the means of mixed payment in M&A,and the main reasons include reducing financing cost,avoiding control transfer and so on.(2)After the issuance of directional convertible bonds,the market gives positive feedback,and at the same time,it can optimize the capital structure of enterprises,bind the interests of both parties to the transaction and ease the information asymmetry;(3)At the same time,directional convertible bonds also have inherent risks,such as non-conversion of shares at maturity and dilution of equity by conversion.Leike Defense reasonably disperses these risks through downward revision of conversion price terms,flexible use of mixed payment methods,setting conversion lock-up period and performance compensation through convertible bonds.Finally,combined with the case of Leike Defense’s merger and acquisition of Heng da Microwave,this paper gives suggestions from the perspectives of regulators,acquirers and acquired parties,providing experience and reference for the development of directional convertible bonds in China,and puts forward the shortcomings and prospects of this article.