A Study On The Risk Prevention And Control Of Directed Convertible Bonds In Mergers And Acquisitions

Suzhou Secote Precision Electronic Co.,Ltd.as a leading enterprise in the high-tech industry of automation equipment is mainly engaged in the research and development,design,production,sales and technical services of automation production equipment,and provides system solutions for customers to realize intelligent production.However,high-tech industry has higher and higher requirements for technological innovation and talent introduction,the profit growth rate of Secote gradually slowed down in the years before the merger and acquisition.From 2016 to 2018,the operating income of Secote was 403 million yuan,683 million yuan and 904 million yuan respectively,and the net profit was 48 million yuan,96 million yuan and 121 million yuan respectively.It can be seen that the growth rate of operating income of Secote shows a downward trend,and the growth rate of net profit drops by nearly 74% in 2018 compared to 2017.Therefore,under the guidance of the development strategy of "specialization,refinement,expansion and strength",Secote has made great efforts in transformation and upgrading,seeking horizontal development in the automation industry,so as to better serve customers and promote the development and expansion of the automation equipment industry.Automation equipment industry as a typical technology-intensive industry requirements customization and non-standard.There are higher barriers to technical barriers,customer resources barriers and R&D personnel barriers,all of these features and barriers determine the enterprise needs a certain technology accumulation and precipitation and the self-development often requires a longer cycle.In response to this situation,Secote has carried out a series of horizontal mergers and acquisitions in the industry since its listing.On November 2,2018,Secote announced that it would acquire 100% of the shares of Suzhou Lingou Automation Technology Co.,LTD.with a total of 210 million yuan,and planned to purchase and raise supporting funds by means of30% cash payment,10% share payment and 60% targeted convertible bond payment.But Lingou Technology as a small and mid-sized company of science and technology has characteristics such assmall size,asset-light and customer business uncertainty caused by highly concentrated.These characteristics make Secote face a series of merger and acquisition risk intrading.Given the Secote using targeted convertible bond as payment in this case,this paper hopes to combined with the existing research to explore targeted convertible bonds how to prevent and control the risk of merger and acquisition.In this regard,this paper makes a step-by-step study of the merger and acquisition of Lingou Technology by Secote according to four parts: introduction,case background review,case analysis,enlightenment and suggestions.The study finds that the payment tool of targeted convertible bond is the best solution for Secote to prevent and control the risks of merger and acquisition and balance the interests of both parties.On the one hand,cash payment has the most outstanding prevention and control effect on anti-merger risk and can realize merger and acquisition in the fastest speed.However,it is faced with huge manpower integration risk.For the merger and acquisition of scientific and technological companies such as Lingou Technology,itis the key to retain core personnel for incentive integration and retain core technology to the success of merger and acquisition.On the other hand,the stock payment procedures are complicated and too long,the issuance cost is too high,which is not conducive to the realize strategic objective rapidly.Moreover,the high issuance cost does not match the scale of merger and acquisition and the excessive share payment is not suitable for such mergers and acquisitions.Targetedconvertible bonds payment relieves cash pressure on the company and reduces pay costs greatly.For instance,the bond coupon rate of this case is only 0.01% and generally with performance compensation,incentive mechanism and so on,which is effective for the prevention and control of strategic risk.So targeted convertible bond is an essential means of payment in preventing and controlling mergers and acquisitions risk.