03 Aug Financing M&A
What is a merger or acquisition? A merger or acquisition occurs when a business owner decides to relegate control or partial control of their company for a certain amount of money or assets. Standard merger deals generally involve administrators, lawyers, and investment bankers in order to evaluate the profitability and assets of your company. Both the original owner and the intended owner can help a business expand, gain knowledge, move into new market segments, and improve input. Below we’ve compiled some of the best options for financing a merger or acquisition to help ease the process and help businesses understand their financial opportunities.
Paying in Cash
This is the generally the most straightforward and preferred method for financing a M&A. This method is valued because it is clean, immediate, and does not require higher levels of management intervention. The biggest advantage of paying with cash is that it is less dependent on a company’s performance. Of course this is not the case if more currencies are involved in the M&A process as the exchange rates vary from time to time. Though cash is preferred, many companies who want to merge can run into the billions making the cost too high for companies to outright buy their share.
Lenders and owners who agree to an extended payment arrangement will expect a reasonable rate for the loans they make. Even when interest is relatively low, costs can quickly add up during a multi-million-dollar M&A making this method risky and potentially lethal for a new business. Interest rates are a primary consideration when financing a merger with debt, and a low rate can increase the number of loan-funded transactions.
An alternative way to acquire a M&A is to agree to take on a seller’s debt. In these circumstances, the debtor’s priority is to reduce the risk of additional financial losses due to an inability to make up leeway on payments. A creditor can be incentivized to take on a seller’s debt if they wish to restructure a company. Maybe they want to take advantage of assets like business contacts of property. This can be a mutually beneficial deal for both parties. Creditors benefit from a very cheap way to acquire assets and take on greater management capabilities during liquidation, and sellers can see their sale value reduced or eliminated.
Initial Public Offerings
An IPO is a great way for a company to raise funds, especially during a merger and acquisition. Having a solid long-term strategy and desire to expand can make investors excited about the future of a company. An IPO also helps induce excitement in the marketplace to increase the early price of shares. However, market mercuriality makes this a risky way financing a venture as the popularity declines with each fiscal year. The market can drop as quickly as it rises. A new company that is exchanging leadership is more vulnerable to financial losses.
Exchanging stocks is the most common way financing a merger or acquisition. This method is thought to be a relatively safe option. Both parties can equally share any risk in the future price of a company’s stock. In this scenario, the buying company will exchange its stock for a certain share of the seller’s company. If the stock price increases, the buyer can receive more money than if they had paid in cash. However there is always a risk of stock decline. This risk magnifies if traders learn about the merger or acquisition before the deal is final.
Issuance of Bonds
Corporate bonds are a simple, quick way to raise cash from current shareholders or the general public. In buying a bond, an investor loans money to the company in hopes of a return, however the money can’t be used until the bond’s maturation date. Today, companies are taking advantage of low U.S. interest rates to fund M&A. However, the trend ties closely to the cost of borrowing, and bond issuance is only a good value if the buyer can cheaply access credit and has a clear goal.
Financing a M&A: Conclusion
There are many ways that allow financing a merger or acquisition, many of which result in an effortless, lucrative, and quick transaction. The best method depends on each comapny, their respective share situations, asset values, and debt liabilities. You should not be forget that each method can have disadvantages and contains a certain amount of risks. All of them need time management and commitment, as a M&A takes time to finalize and bring in the wanted results. To make the process easier the buyer and seller need to practice Due Dilligence in order to make a smooth transaction possible.
The invested effort makes most mergers and acquistions worthwhile. Because it creates a more diverse, stronger firm than compared to a single company who struggles with their finances.