Both mergers and takeover require a lot of cash – and if cash is not available, some other form of financing may need to be arranged. There are various methods to finance a mergers or takeover deal.
Cash. The most straightforward method to finance a merger or acquisition deal is to use cash to buy out the target company. In such instance, the cash can be taken from the cash reserves sting in the bank or the retained earnings available to the buyer company. The buyer will able to pay cash to the target company either to acquire the shares of the target company or the entire company (Bogan & Just, 2009).
Offer of equity. The usage of cash may be less practical, as the total amount of cash involved in a merger or acquisition can be very large. As such, the acquirer company may offer its company’s shares to the target company in exchange for the target company.
Issuance of new shares. Sometimes, when the cash is insufficient, the acquirer company may issue new shares to raise fund for the deal. Private placement may be used. Via the issuances of new shares, the company able to gather new fund or cash from the shareholders who wish to subscribe to the lower priced newly issued shares. On the other hand, the acquirer company will be able to access to the fund it require in completion of the merger or acquisition deal (Bogan & Just, 2009).
Exchange of equity. Often in a merger, the acquirer or both the companies in the merger deal can exchange their shares. The original shareholders of two companies will eventually become the shareholders of the newly merged company. The newly merge company may be a single entity, or a separate one (with new parents and subsidiaries relationship).
Debt financing. To issue bond or preferred shares to finance the merger or acquisition deal is a common one. Usually this is facilitated by an investment banker, the acquirer company will be able to issue debt debentures or bond or anything equivalent to finance the deal (Meigs, Haka, and Bettner , 1999).
Mixture of any of the methods mentioned above. Apart from the above mentioned approaches of financing, the companies involved in merger and acquisition can also employ a mixture of the financing methods outlined above to implement its plan.
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