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Merger & Acquisition Financing

September 7, 2023
Bill Kimball

However, it is important to note that for large acquisitions, acquisition finance structures may combine more than two financing methods. A leveraged buyout is a transaction where a business is acquired using debt as the main source of consideration. However, the acquisition of another company is a major decision that needs sound financial resources. In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. For example, in 1998, a merger deal occurred between the Digital Equipment Corporation and Compaq, whereby Compaq absorbed the Digital Equipment Corporation. This was combined with Hewlett-Packard’s ticker symbol to create the current ticker symbol .

Acquisition financing is also more flexible, due to the absence of commitment for periodic payments. Unfriendly or hostile takeover deals, in which target companies do not wish to be purchased, are always regarded as acquisitions. A deal can be classified as a merger or an acquisition based on whether the acquisition is friendly or hostile and how it is announced. In other words, the difference lies in how the deal is communicated to the target company’s board of directors, employees, and shareholders. We know that the most expensive form of capital is equity and the same goes for the case of acquisition financing too. The rise of globalization has exponentially increased the necessity for agencies such as the Mergers and Acquisitions International Clearing , trust accounts and securities clearing services for Like-Kind Exchanges for cross-border M&A.

merger financing

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments. She most recently worked at Duke University and is the owner of Peggy James, CPA, PLLC, serving small businesses, nonprofits, solopreneurs, freelancers, and individuals. Virala Acquisition Company is a Finnish SPAC which was founded by industrial family enterprise Virala Oy Ab. Its goal is to acquire a company seeking growth and with strong ties to Finland.

Guide To Mergers And Acquisitions

The purchase of assets is typical during bankruptcy proceedings, wherein other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms. We have understood the features of debt and equity investments, but there are certainly other forms of structuring the deal. Technically defined, LBO is a purchase of a public/ private company or the assets of a company that is financed by a mix of debt and equity. One of the most preferred ways of financing acquisitions is debt financing. Paying out of cash isn’t the forte of many companies, or it is something that their balance sheets don’t permit. It is also said that debt is the cheapest method of financing an M&A bid and has many forms of it.

When providing funds for an acquisition, the bank usually analyzes the target company’s projected cash flow, profit margins, and liabilities. Analysis of the financial health of both the acquiring company and the target company is a prep course. Generally speaking, in the days leading up to a merger or acquisition, shareholders of the acquiring firm will see a temporary drop in share value. At the same time, shares in the target firm typically experience a rise in value. This is often due to the fact that the acquiring firm will need to spend capital to acquire the target firm at a premium to the pre-takeover share prices. After a merger or acquisition officially takes effect, the stock price usually exceeds the value of each underlying company during its pre-takeover stage. In the absence of unfavorableeconomic conditions, shareholders of the merged company usually experience favorable long-term performance and dividends.

merger financing

In 1821, the Hudson’s Bay Company merged with the rival North West Company. Replica of an East Indiaman of the Dutch East India Company/United East India Company . It was possibly in fact the first recorded major consolidation and is generally one of the most successful mergers in the history of business. Covenants, which govern the conduct of the parties, both before the closing and after the closing (such as covenants regarding future income tax filings and tax liability or post-closing restrictions agreed to by the buyer and seller parties). A really confident acquirer would be expected to pay for the acquisition with cash. It can be challenging to find a suitable JV partner, as many joint ventures destroy value as creating it, and your efforts to make management decisions at the acquired business may be stifled in the long run by virtue of controlling less of its equity. Leveraged buyouts are similar to earnouts in the sense that they allow the buyer to commit very little of their own capital.

The documentation of an M&A transaction often begins with a letter of intent. Structuring the sale of a financially distressed company is uniquely difficult due to the treatment of non-compete covenants, consulting agreements, and business goodwill in such transactions.

Merger Of Equals

By consolidating into YRC Worldwide, the company lost the considerable value of both Yellow Freight and Roadway Corp. The strongest legacy brand with the best prospects for the future lives on. In the merger of United Airlines and Continental Airlines, the United brand will continue forward, while Continental is retired. Highly focused and specialized M&A advice investment banks are called boutique investment banks.

  • Conditions, which must be satisfied before there is an obligation to complete the transaction.
  • Equity FinancingEquity financing is the process of the sale of an ownership interest to various investors to raise funds for business objectives.
  • A mezzanine fund is a pool of capital which invests in mezzanine finance for acquisitions, growth, recapitalization, or management/leveraged buyouts.
  • As quasi-monopolists, firms set quantity where marginal cost equals marginal revenue and price where this quantity intersects demand.
  • We combine this informed perspective with our product knowledge and market expertise to work with you and your team on a vision for your business, and we have the capital strength to help support your goals.

‍As with an LBO, this is one of the riskier strategies for financing a business acquisition, and it may be difficult to find someone willing to finance the assets at a price that meets the seller’s valuation of their own business. In many scenarios, having the seller involved with the future of Newco can be very helpful. So, as an example, if you give the seller a 10% stake in Newco, you only need to fund the 90% of the company’s valuation upfront. Sometimes you can implement a merger by basically using your equity as a currency, and negotiating a pro rata stake in the combined company. If they are not the same size, use a metric like relative revenues or relative EBITDA and set the relative ownership that way (e.g., if one business generates 75% of the combined profits day one, they could own 75% of the combined equity in Newco). “No.” The Dell-EMC deal that closed in September 2016 is a clear enough indication that Leveraged buyouts are back. The deal is worth about $60 billion, with two-thirds of it financed by debt.

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What To Read Next: How To Finance The Purchase Of A Business

Is a unique mix of both equity and debt that is used to finance an acquisition. In an LBO, the assets of both the acquiring company and target company are considered as secured collateral. The equity portion of the balance sheet of the parent company remains the same. Cash transactions during an acquisition often happen in situations where the company being acquired is smaller and with lower cash reserves than the acquirer. Note that the shareholders of both companies may experience adilutionof voting power due to the increased number of shares released during the merger process. This phenomenon is prominent instock-for-stock mergers, when the new company offers its shares in exchange for shares in the target company, at an agreed-uponconversion rate.

This type of M&A process aims at creating synergies in the long run by increased market share, broad customer base, and corporate strength of business. A strategic acquirer may also be willing to pay a premium offer to target firm in the outlook of the synergy value created after M&A process. They need to like the industry, the team, the historical cash flow trends, the underlying assets of the business they can secure, the financial covenants, etc. And, the more cash flow you have as a combined company, the higher odds a bank with lend to you.

Nevertheless, where two businesses can find the right harmony, the combined expertise provided by two sets of management can generate considerably more value. There’s a considerable amount of technicality involved here, which varies from state to state, but you will need to keep a serial number for each bond sold and to make payments at regular agreed intervals. Although it’s never a bad idea to shop around when looking at debt options. An LBO has a huge payoff if you manage to pull it off, but it can quickly sink those businesses that don’t.

merger financing

If not properly dealt with, these factors will likely have adverse consequences on return-on-investment and create difficulties in day-to-day business operations. It is advisable that M&A tools designed for mature economies are not directly used in emerging markets without some adjustment. M&A teams need time to adapt and understand the key operating differences between their home environment and their new market. Even mergers of companies with headquarters in the same country can often be considered international in scale and require MAIC custodial services. For example, when Boeing acquired McDonnell Douglas, the two American companies had to integrate operations in dozens of countries around the world . This is just as true for other apparently “single-country” mergers, such as the 29 billion-dollar merger of Swiss drug makers Sandoz and Ciba-Geigy . A major catalyst behind the Great Merger Movement was the Panic of 1893, which led to a major decline in demand for many homogeneous goods.

The shareholders make gain from such holdings in the form of returns or increase in stock value. Any M&A transaction, no matter the size or structure, can have a significant impact on the acquiring company. In a similar example, if a video game publisher purchases a video game development company in order to retain the development studio’s intellectual properties, for instance, Kadokawa Corporation acquiring FromSoftware. The vertical buying is aimed at reducing overhead cost of operations and economy of scale. M&A advice is provided by full-service investment banks- who often advise and handle the biggest deals in the world – and specialist M&A firms, who provide M&A only advisory, generally to mid-market, select industries and SBEs.

Tender Offers

Of course, Company Y becomes merely a shell and will eventually liquidate or enter other areas of business. Operating Cash FlowsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital. Equity InvestorsAn equity investor is that person or entity who contributes a certain sum to public or private companies for a specific period to obtain financial gains in the form of capital appreciation, dividend payouts, stock value appraisal, etc. Equity FinancingEquity financing is the process of the sale of an ownership interest to various investors to raise funds for business objectives.


Consolidation/amalgamation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently. Acquisitions are divided into “private” and “public” acquisitions, depending on whether the acquiree or merging company is or is not listed on a public stock market. Some public companies rely on acquisitions as an important value creation strategy. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. From a legal point of view, a merger is a legal consolidation of two entities into one, whereas an acquisition occurs when one entity takes ownership of another entity’s share capital, equity interests or assets. From a commercial and economic point of view, both types of transactions generally result in the consolidation of assets and liabilities under one entity, and the distinction between a “merger” and an “acquisition” is less clear.

What Does A Merger Or Acquisition Mean For The Target Company’s Employees?

But in an exchange of shares, it becomes far less clear who is the buyer and who is the seller. In some cases, the shareholders of the acquired company can end up owning most of the company that bought their shares. Companies that pay for their acquisitions with stock share both the value and the risks of the transaction with the shareholders of the company they acquire. The decision to use stock instead of cash can also affect shareholder returns. In studies covering more than 1,200 major deals, researchers have consistently found that, at the time of announcement, shareholders of acquiring companies fare worse in stock transactions than they do in cash transactions. What’s more, the findings show that early performance differences between cash and stock transactions become greater—much greater—over time.

The rest goes to Seller Inc.’s shareholders, who are now shareholders in an enlarged Buyer Inc. So, to take a basic example, you could pay 30% of the firm’s value upfront and 20% of its revenues in each of the first five years after the acquisition. You can see how this could become creative quite quickly, involving all manner of triggers and clauses. With the beginning of the year balance sheet showing a healthy cash balance, you may be encouraged to seek out an acquisition in the coming months.

Financing for acquisitions can be procured in various forms, but what matters most is how optimal it is and how well-aligned it is with the nature and larger goals of the deal. Designing the financing structure according to the suitability of the situation matters most. Also, the capital structure should be flexible enough to be changed according to the situation.