What is acquisition financing?

Finance ManagementBanking & FinanceGrowth & Empowerment

To fund a merger and acquisition, the source of capital is required. To attain those funds is a complex thing because; it requires a lot of variations and combinations. Proper planning is required to get the capital for merger and acquisition. With various alternatives available, a proper mix is selected to get the low cost of capital.

Types

The types of acquisition financing are as follows −

  • Stock swap − Acquirer exchange stock with the targeted company.

  • Equity − Acquiring companies targets the companies which operate in an unstable industry with uneven cash flows.

  • Cash − Takes place if an acquired company has smaller/low cash reserves.

  • Debt − Banks lend the funds on collateral offers.

  • Quasi debt − Option of converted to equity.

  • Leveraged buyout − Mix of debt and equity.

  • Sellers financing − Acquisition financing is internal.

Benefits

  • Speedy acquisition − Asset financing makes acquirer get sufficient funds to make acquisition in time or within time frame

  • Enables phase wise acquisition − It assures line of credit to seller, so that receiver receives requirement payment in time and make acquirer ready to enter staggered acquisition.

Methods

The methods of acquisition financing are as follows −

  • Exchange stocks − Buyer companies exchange stocks for shares.

  • Debt acquisition − Accepts sellers’ debt in an alternative of paying cash or stock.

  • Cash payments.

  • Initial public offering (IPO)  − Company can raise funds any time.

  • Bonds − Company issues bonds (time defined) with interest rates (predetermined).

  • Loans − Takes loans from the third parties/institutions/banks with reasonable interest rates.

Methodologies

The methodologies of acquisition financing are explained below −

  • Cash transactions − This type is preferred when the acquiring company is bigger than Target Company. This acquiring company has substantial cash reserves.

  • Stock swaps − This is a common method used by companies (stocks are publicly traded) and for private companies is a sensible option. In this certain methodologies are followed for valuations like DCF valuation, comparable company analysis and comparable transaction valuation analysis.

  • Debt financing − It is the cheapest method used by companies whose balance sheet or their cash balances don’t permit cash transactions.

  • Quasi debt − It has both characteristics of debt and equity or it is an amalgamated form of capital. Companies having a strong balance sheet and getting consistent profitability are best suited for this method.

  • Equity investment − Companies who are operating in volatile industries or having unstable cash flows opt for equity financing.

  • Seller financing − In this, an acquirer seeks financing from the target company by earn-outs, delayed payments, consulting agreement notes etc.

  • Leveraged buyout − It is similar to usual merger and acquisition deals.

raja
Updated on 17-May-2022 13:17:09

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