Research On The Motivation And Effect Of Using Directional Convertible Bonds

Since the twenty-first century,the main payment instruments in China’s M&A market have been mainly cash and equity payments.The limitations of a single M&A payment method make it difficult to meet the needs of M&A parties in a market downturn.In order to enrich M&A payment methods and promote the prosperity of the M&A market,in November 2018,the SFC officially launched the pilot work on the use of directional convertible bonds in M&A payments to promote the use of directional convertible bonds.Under the influence of the national policy promotion and the successful cases of pilot companies,several companies have introduced directional convertible bonds in their M&A payment schemes.convertible bonds have been used late in China’s M&A market,and there are few studies in the existing literature on the applicability and implementation effects of convertible bonds,and they are not yet conclusive.In this paper,we select Changchun High-Tech Industries INC,which was one of the first companies to try directional convertible bond M&A,as a case study.Based on the existing literature,we sort out the event and the terms and conditions of the convertible bond,and introduce the situation of both sides of the M&A from the aspects of main business,financial status,industry status and development philosophy,and systematically introduce the specific process of the M&A activity,the payment method of the M&A consideration and the design of the terms and conditions of the directional convertible bond.The motivation for choosing the directional convertible bonds is explored.Then,the EPS M&A payment effect evaluation model is constructed to analyze the scientificity of the targeted M&A method,and the event study method is applied to explore the market reaction to the targeted M&A.Finally,we summarize the results of the study and the successful experience of the firm in issuing targeted convertible bonds as M&A payment instruments.Through the above study,this paper draws the following conclusions:(1)Changchun High-Tech Industries INC chose to issue directional convertible bonds as M&A payment instruments mainly for the reasons of easing cash flow pressure,reducing M&A costs,delaying equity dilution,and increasing negotiation flexibility;(2)the directional M&A decision brings better short-term and long-term economic effects to the enterprise;(3)directional M&A can improve corporate governance,optimize the enterprise’s capital structure,alleviate agency problems,and bundle the interests of both parties,which brings a great boost to the development of enterprises.All of the above findings suggest that targeted M&A can bring positive effects to enterprises,but enterprises should choose M&A payment methods based on their own situation and set appropriate ratios to develop scientific M&A payment schemes;regulators should also strengthen legislation and improve supervision mechanisms.