Mergers and Acquisitions Deal Financing
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Questions and Answers

What is a common way that firms finance M&A deals?

  • Combination of cash, stock, and debt (correct)
  • Using only cash on hand
  • Issuing only new equity
  • Issuing new debt
  • Why do companies issue shares prior to a bid?

  • To attract new investors
  • To reinvest in the company
  • To finance the acquisition (correct)
  • To increase liquidity
  • What is a reason for a company to decouple the decision to buy from the financing structure?

  • To reduce the company's liquidity
  • To increase the company's creditworthiness
  • To make the company less attractive to investors
  • To attract specific investors (correct)
  • What is influenced by variables such as the state of capital markets and the liquidity of the target company?

    <p>The choice of financing source</p> Signup and view all the answers

    What can be a result of issuing shares prior to a bid?

    <p>Attracting investors who support acquisitions</p> Signup and view all the answers

    Why might a company choose to use a combination of financing sources?

    <p>To take advantage of current market conditions</p> Signup and view all the answers

    What can be a benefit of decoupling the decision to buy from the financing structure?

    <p>Attracting specific investors</p> Signup and view all the answers

    What can be a result of a company's acquisition announcement?

    <p>Increased acquirer returns</p> Signup and view all the answers

    What is the primary advantage of a corporate or divisional structure in an acquisition?

    <p>It enables the acquirer to immediately integrate the target after the transaction.</p> Signup and view all the answers

    Which of the following may be a disadvantage of a joint venture or partnership structure in an acquisition?

    <p>It leads to slower decision making and implementation due to distributed ownership.</p> Signup and view all the answers

    When would a holding company structure be preferable as the acquisition vehicle?

    <p>When the target company is a foreign corporation.</p> Signup and view all the answers

    What is a potential benefit of running the target company in a distinct manner from the rest of the acquirer's operations in an international acquisition?

    <p>It reduces the risk of cultural differences.</p> Signup and view all the answers

    What is a possible advantage of an earn-out structure in an acquisition?

    <p>It allows the acquirer to maintain target independence throughout the duration of the earn-out.</p> Signup and view all the answers

    What is a potential benefit of using a holding company structure in an acquisition?

    <p>It allows the acquirer to isolate specific liabilities of the target company.</p> Signup and view all the answers

    Why might a holding company structure be preferred when the target company has large liabilities?

    <p>It enables the acquirer to isolate specific liabilities of the target company and push the subsidiary into bankruptcy.</p> Signup and view all the answers

    What is a potential advantage of using an earn-out structure in an acquisition when the target company is a foreign corporation?

    <p>It enables the acquirer to maintain target independence throughout the duration of the earn-out.</p> Signup and view all the answers

    What can an acquirer do to enhance the value of a deal in the short run?

    <p>Time the issuance of shares to periods when they are highly valued by investors</p> Signup and view all the answers

    What is one of the factors that contribute to the desirability of long-term debt?

    <p>Potential for debt to boost earnings per share and returns on equity</p> Signup and view all the answers

    What has been the trend in the proportion of businesses operating with little to no leverage in the United States since the 1970s?

    <p>A significant rise</p> Signup and view all the answers

    Why do companies place a higher value on low leverage?

    <p>To have the flexibility to fund desirable but unexpected investment opportunities</p> Signup and view all the answers

    What is one of the financing options available to an acquirer?

    <p>Issue of equity and/or preference shares</p> Signup and view all the answers

    What can hinder a company's capacity to finance unanticipated investment opportunities?

    <p>High leverage</p> Signup and view all the answers

    What is the consequence of an excessive amount of debt?

    <p>Increased default risk</p> Signup and view all the answers

    What has increased from approximately 14% in 1977 to approximately 35% in 2010?

    <p>The percentage of businesses with debt that is less than 5% of their total capital</p> Signup and view all the answers

    Study Notes

    Deal Financing

    • M&A deals are frequently financed using cash, stock, debt, or a combination of all three.
    • The choice of financing source or sources is influenced by various factors, such as:
      • State of the capital markets
      • Liquidity and creditworthiness of the target and acquiring companies
      • Combined borrowing capacity of the target and acquiring companies
      • Size of the transaction
      • Target shareholders' preference for cash or acquirer shares

    Financing Options

    • Issue of equity and/or preference shares
    • Internal accruals
    • Long-term loans from banks or other lenders
    • Issue of convertible/non-convertible debentures or other types of domestic or foreign debt instruments

    Advantages and Disadvantages of Debt

    • Debt can boost earnings per share and returns on equity
    • The cost of debt after taxes is relatively modest
    • However, an excessive amount of debt can make the possibility of default more likely
    • High leverage can hinder a company's ability to finance unanticipated investment opportunities
    • Since the late 1970s, there has been a significant rise in the proportion of businesses operating with little to no leverage in the United States
    • The percentage of businesses that have no debt has climbed from about 7% in 1977 to approximately 20% in 2010
    • The percentage of businesses that have debt that is less than 5% of their total capital has increased from approximately 14% in 1977 to approximately 35% in 2010

    Post-Closing Integration

    • The acquiring company may opt for a structure that makes post-closing integration easier, reduces the risk of the target's known and unknown liabilities, minimizes taxes, passes through losses to shelter the owners' tax liabilities, and maintains target independence throughout the duration of an earn-out
    • The corporate or divisional structure is frequently chosen when the acquirer plans to immediately integrate the target after the transaction has been finalized
    • Joint ventures and partnerships may slow down decision-making and implementation due to distributed ownership

    Holding Company Structure

    • A holding company structure may be preferable as the acquisition vehicle when the target company has large liabilities, an earn-out is required, or the target company is a foreign corporation
    • This structure allows the parent to isolate specific obligations within the subsidiary and push the subsidiary into bankruptcy without putting the parent in jeopardy

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    Description

    This quiz covers deal financing methods in M&A, including cash, stock, debt, or a combination, with an example of Altice's acquisition of Cablevision.

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