Financing Structures and Concepts Quiz

Financing Growth 1: JV & M&A

• This module covers financing options for joint ventures (JVs) and mergers and acquisitions (M&A).
• The focus is on publicly listed companies.
• Management does not own the company but runs it on behalf of the shareholders.
• Key learning outcomes include understanding various financing options, JV and M&A financing options, leverage for growth strategies and the capital raising implications of chosen structures.

BTR2 Student Journey

• This outlines the student journey for the BTR2 module, including various stages and associated tasks.
• The sequence includes topics such as Deeper Understanding, Strategic Alliance Path, M&A Path, and Organic Growth Path.
• Subsequent steps involve creating a Transformation Plan, Coaching Session, Business Inspiration Day, and Summative Assessment.
• Further stages include Make it Real 1 & 2, Change Action Plan, tests and tying together the knowledge exam, transformation plan and the final poster or fair presentation.
• The module includes strategic finance, regulation and ethics, strategic marketing materials.

Business Transformation 2

• Highlights that digital transformation, strategic finance, and change are crucial components.
• Leadership, people & culture, regulation, strategic marketing, and ESG are also critical elements of business transformation.
• The material presents a holistic view of business transformation.

Strategic Finance

• There are masterclasses and classroom interactions to support student learning with strategic finance.
• Specific dates (4 and 5) are highlighted showing these interactive components.

Strategic Finance: Financing Growth 1 - Learning Outcomes

• Learn about various financing options available.
• Understand the financing options available for JV and M&A.
• Recognize the risk and opportunities of leverage for growth strategies.
• Understand the capital raising implications of chosen structure.

Why is this relevant to me?

• Strategic Finance is a key element for grading the Pitch, part of the Fair poster rubric, 2 & 3 in both rubrics, and the Knowledge Exam.
• Students need to understand financing options for JVs and M&As for real-world application.
• This understanding is critical for advising on the best funding options.
• Recognizing risks associated with different financing options is important.

Remember:

• Analysis should focus solely on publicly listed companies.

Specific Debt Financing

• Loans: Money borrowed with interest over a set period. Can be secured or unsecured; financing a wide range of activities.
• Bonds: Debt securities issued to investors for an agreed return over a specified time period; can be publicly or privately placed; funds used for long-term investments
• Lines of credit: Pre-approved borrowing limit allowing the company to access funds as needed, only interest will be charged on the amount borrowed. - Secured or unsecured.
• Convertible bond: Debt with an option to convert to company equity at a later date. Attractive for investors wanting both security and potential upside.
• Lease financing: Borrowing money to purchase or lease assets (equipment/vehicles). The lender retains ownership until loan repayment.

Pros of Debt Financing

• Interest on debt is tax-deductible.
• Fixed interest expense, doesn't impact shareholder value negatively during profitable periods.

Cons of Debt Financing

• Regular payments regardless of company performance.
• Non-payment could lead to financial distress (bankruptcy), often with restrictive covenants.

Equity Financing

• Common stock: Company issues shares to investors for ownership. Investors entitled to vote on company matters and may receive dividends.
• Preferred stock: Company issues shares with preferential rights to dividends and distributions. Preferred stockholders get their investment back before common stock in liquidation.
• Convertible equity: Investors receive equity convertible to other equity or debt later. Benefits from potential upside or has security of fixed-income investment.
• Stock options: Companies issue options to purchase stock to employees or stakeholders. These are typically exercised over time with a strike or exercise price, and a vesting period.

Pros of Equity Financing

• No regular payments required (dividends optional).
• No need for collateral or personal guarantees.

Cons of Equity Financing

• Dilutes current shareholders.
• Shareholders often expect higher returns, impacting long-term profitability.
• Equity financing is costly, due to high transaction and legal fees.

Mezzanine Financing

• A hybrid of debt and equity financing giving the lender the right to convert debt to an equity interest in case of default (after other claims are covered).

Pros of Mezzanine Finance

• Potentially cheaper than pure equity.
• Offers flexible repayment and ownership structure
• Can be tailored to specific company and project needs.

Cons of Mezzanine Finance

• Hybrids can be complex, entail higher fees and legal costs.
• Can dilute current shareholders.
• More costly than pure debt financing.

Factors to Consider when Selecting Financing

• Debt: Company's creditworthiness, interest rates, loan terms and conditions, collateral requirements, and debt-to-equity ratio.
• Equity: Investor expectations, the amount of equity to be issued, valuation of the company, degree of dilution of current shareholders.
• Mezzanine: The specific terms and conditions of the transaction, balancing debt and equity considerations. Potential costs and complexity, impact on the debt-to-equity ratio.

Financial Factors

• Fiscal, Capital Market, Foreign Exchange, County/Political, Economic, Governance and Reputational.

Joint Ventures (JVs)

• Contractual agreement between two or more businesses.
• Pooling resources and expertise to achieve a specific goal; often but not always 50-50.
• Companies creating a new entity (company C). Original entities (A and B) continue to exist.
• Types include project-based, vertical, horizontal, and functional.

JV Financing

• Capital contributions proportionate to ownership stakes.
• Loans, bonds, and mezzanine finance can also be used.

Mergers and Acquisitions (M&A)

• General term describing the consolidation of companies or assets.
• Includes mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.

Motivation for Change (M&A)

• Growth, Regulation, New Opportunities, and Threats.
• Vertical acquisition, Horizontal acquisition and Diversification.

Checklist for New M&A Opportunity

• Identify target
• Assess success chances
• Value target
• Legal compliance
• Integration
• Assess future cash flows, Discounted cash flows
• Relative pricing.

Acquisitions vs Mergers

• Mergers: Friendly, companies agree, new company formed, original entities dissolved. Shares of old entities are canceled, replaced by shares of the new entity. The companies are similar in size.
• Acquisitions: One company buys another (often larger acquiring company), often not friendly, acquisition company's shares are not cancelled, but the acquired company's shares might still exist.

Merger Considerations

• Fiscal: tax implications based on how assets are valued.
• Capital market: financing needed and multiple ways of executing.
• Reputational implications: mergers viewed as friendlier than acquisitions.

Mergers Examples

• Kraft Heinz, DSM-Firmenich, DowDuPont

Acquisition Considerations

• Fiscal, Capital Market, Foreign Exchange, Reputational factors to considers.

Acquisitions Examples

• Microsoft, eBay, Google.

Financial Advantages of M&A

• Increased revenue, cost savings, improved profitability, and increased market capitalization.

Financial Disadvantages of M&A

• Acquisition costs, integration costs, reduced liquidity for shareholders, increased debt risk, and potential loss of shareholder value.

M&A Financing

• Exchanging stock, debt financing, bond issuance, bank loans, mezzanine financing, and IPOs are common finance sources.

Other Considerations

• Anti-trust law, securities laws, and tax complications.

BTR2 Boosters tips & tricks

• Assessing various choices (JV, Merger or Acquisition) based on size and different returns.
• Identify benefits and drawbacks of choices for finance sources.

Strategic Finance: Financing Growth 2 - Quick Recap

• Learn about various financing options.
• Understand JV and M&A financing options.
• Recognize the risk and opportunities of leverage for growth strategies.
• Understand the capital raising implications of chosen structure.

Recap: Why is this relevant?

• Strategic Finance is key to the pitch, and fair poster.
• Finance is part of the knowledge exam.

Workshop Preparation for WK14

• Review all available materials on financial options for each growth path.
• Prepare advice on best fitting financial options for the chosen strategic growth paths.
• Explain the chosen growth path's advantages and why other options are less beneficial (including finance considerations). Discuss with team to underpin your final recommendation.

Test your knowledge on various financing structures and concepts, including convertible debt, mezzanine financing, and revenue-based financing. This quiz explores key features, advantages, and potential downsides of different financing options, helping you understand their implications in the financial world.