Mergers & Acquisitions from A to Z

By Andrew J. Sherman | Go to book overview

CHAPTER 9
Financing the Acquisition

Let’s assume that the buyer’s team has followed all of the steps in the process thus far: It has identified its strategic objectives, prepared the acquisition plan, identified the qualified candidates, narrowed the field, negotiated and signed the letter of intent, conducted the valuation and negotiated the purchase price, completed due diligence, and instructed counsel to start working on the definitive documents. The team breathes a sigh of relief until it realizes: How will we finance this transaction?

There is a wide range of options for financing a transaction, from a simple equity financing to a layered transaction with multiple levels of debt and equity. Since each transaction is unique, the structures will vary. Each deal presents its own challenges, its own set of seller’s needs, its own financial-market conditions, and so forth. And each source of acquisition financing will have its own unique set of evaluation criteria, transactional focus, cost of capital, expectations, deal terms, and covenants. Overall, the key factors that affect the structure are the size and complexity of the transaction, the buyer’s cash position, the market for the buyer’s securities, the terms of the purchase price, and, more prominently since the second half of 2007 and throughout 2008, the macro financial-market conditions.

A key to the type and availability of funding is the structure of the company that is being acquired. A company with little debt, significant assets, and strong cash flow is a good candidate for an acquisition with a significant portion of long-term debt financing. On the other hand,

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