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Debt Financing Preference and the Financing Method of Chinese Outward M&A

Author: GuLiuFeng
Tutor: ZhangCheng
School: Nankai University
Course: World economy
Keywords: M&A financing Financing mode Debt financing preferences Principal-Principal Conflicts Financing constraint
CLC: F275
Type: PhD thesis
Year: 2012
Downloads: 105
Quote: 0
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M&A financing is the foundation and the key to the success of M&A activities.A suitable financing arrangement can not only provide ample funds for the M&Aactivities,but also reduce the financing cost and ease the post-merger burden for theacquirer.It may also affects the capital structure of two sides and probably changesthe control of the corporate. From a macroeconomic viewpoint, whether theacquisition financing tools are diversification, or the financing channels are smoothyis closely correlated with the degree of the country’s financial market development,the soundness of the regulatory system and the perfection of the corporate governance.After2000, the outward FDI of China have growing rapidly, which the main mode ismergers and acquisitions. The buyout activities have become the main channels forChinese enterprises to participate the international business. But the cross-borderM&A financing of Chinese enterprises have showed serious debt financingpreferences, and also faced with a series of flaws and problems such as the paymentmethod is single, the financing mode is backward, the financing channel is narrowand the market-oriented financing decision is poor. How to improve the ChineseM&A financing environment, innovate the M&A financing instruments, broaden theM&A financing channels, and let the M&A financing really become the tool for theChinese enterprise’s healthy growth, have become the common issue and the seriousconcern for the business and financial circles.Debt financing preferences demonstrated in the cross-border M&A of Chineseenterprise is only the appearance, the focus of the dissertation is to reveal the deep-seated reasons that caused these series problems. The dissertation have shown that thedebt financing preferences in Chinese outward M&A is actualy the equity financingpreferences which constricted by financing instruments, the debt financingpreferences did not cover up Chinese corporate goverance mechanism’s imperfect. Itis the principal-agent conflicts and the principal-principal conflicts in the state-ownedenterprises, which have the dual goals of political and economic, that make Chineseenterprises financing behavior in the cross-border M&A irrational from the market view. At the same time the financing constraints which is common for Chineseenterprises, especially the financing instruments constraints greatly limit the range offinancing methods choice in the cross-border M&A, this can give an anotherreasonable explanation of debt financing preference in Chinese cross-border M&A.It can be said that current cross-border M&A financing mode is the result of theinteraction between internal governance mechanisms and the external financingenvironment. But the current financing mode is not sustainable because of its inherenthuge financial risks. It can also hinder the development of the cross-border M&A ofChina, exacerbate the financial risks, and increase the difficulty of integration ofcross-border mergers and acquisitions.The dissertation holds that hybrid financing instruments represented byconvertible bonds, can play an important role in reducing information asymmetry,optimizing the financing structure, avoiding financial crisis, reducing the agency costs,and improving corporate governance, which the pure stock or bond can not achieve.To develop the hybrid financing instruments such as convertible bonds is the maindirection of Chinese cross-border M&A financing tool innovation. As an importantparticipant in international M&A market, Private equity funds itself is also animportant source of financing in the mergers and acquisitions. To introduce privateequity funds as a strategic investor in cross-border M&A, can not only broaden the M&A financing channels, optimize the financing structure, reduce the interest burdenand disperse of financial risks effectively, but also solve the information asymmetryand reduce investment risk, improve the governance structure, dilute the political risk,and provide technical support for cross-border mergers and acquisitions.The dissertation concludes that, the solution to the problems of China’s currentcross-border M&A financing may be a lot, but they can only improve situation fromsome point. The comprehensive settlement of the cross-border M&A financingdifficulties is to remove the administrative controls and to create an open, fair andtransparent legal and institutional environment for the enterprises. Only a faircompetitive environment is a source of financial innovation. Only the deregulationcan open the space of financial innovation, and solve the difficultivies of mergers andacquisitions financing.

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