How to Finance Mergers and Acquisitions

A corporate merger is the combination of the assets and liabilities of two firms to form a single business entity. In everyday language, the term acquisition tends to be used when a larger firm absorbs a smaller firm, and merger tends to be used when the combination is portrayed to be between equals. In a merger of firms that are approximate equals, there often is an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a certain ratio.

Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:


Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders alone.

A cash deal would make more sense during a downward trend in the interest rates. Another advantage of using cash for an acquisition is that there tends to lesser chances of EPS dilution for the acquiring company. But a caveat in using cash is that it places constraints on the cash flow of the company.

To raise cash followings are recommended:

1. Hire a corporate accounting firm to create a comprehensive overall picture of your company's assets and debts. Discuss with them which of your company's assets are no longer necessary or profitable to your business plan.

2. Divest the company of the chosen assets to raise cash to finance your proposed merger or buyout.


Financing capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively, the acquirer's stock may be offered as consideration. Acquisitions financed through debt are known as leveraged buyouts (only if they take the target private), and the debt will often be moved down onto the balance sheet of the acquired company.

When financing through stock followings are recommended:

1. Hire an investment banking firm to review the target company. Ask them to provide you with an estimate of the true worth of the other company's assets and future profits. You will need this information to decide how many shares of stock and at what price to trade in order to effectuate the merger.

2. Negotiate with the other company for the exact amount and price of shares to be given to shareholders in exchange for ownership of the company.

3. Issue the contracted for amount of shares in your company to the shareholders of the company with which you will merge. In this transaction, you are financing the acquisition of another company by having the target company's shareholders become shareholders in your company.


An acquisition can involve a combination of cash and debt, or a combination of cash and stock of the purchasing entity.






David Gomes said...

M&A appears for Mergers and Acquisitions and is the place of corporate strategy, fund and control of purchasing, promoting and splitting organizations. There are some essential differences between mergers and acquisitions. Put basically, a purchase is when one organization buys another while a merging is where two or more organizations merge.

Mergers and Acquisitions

Smith Johnson said...

Does your company assign full-time teams to acquisition pursuits, or rely on part-time efforts from people who also have a day job? The pressures of day-to-day job responsibilities for key staff members make it incredibly difficult for them to focus on a part-time assignment related to Merger and Acquisition activity. The early assignment of skilled full-time resources to these tasks as early as possible in the due diligence phase of the acquisition or merger process is often critical to success.
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