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Mergers and Acquisition Finance
Mergers and acquisitions provide companies with essential methods to expand business and reduce competition, but how are these large financial endeavours funded? At Clifton Private Finance, our business finance team have the answers.
Contents
What Are Mergers and Acquisitions?
The 3 Methods of M&A Finance
Recent Business Finance Case Studies
The Costs of Mergers and Acquisitions
Tailoring M&A Finance with Clifton Private Finance
What Are Mergers and Acquisitions?
Mergers and acquisitions happen when two businesses combine to become one. This can take place with several different structures:
Mergers: where the two businesses join together in equal, or near-equal, portions to make a new, larger, entity.
And acquistions: where one larger business purchases the target business and absorbs it into its existing structure.
There is a range of M&A types, depending on the company objectives and overall strategy, but they all have one thing in common: the need for financing.
The 3 Methods of M&A Finance
Depending on the structure of the M&A deal, different finance options will have their own pros and cons, however, the core of M&A finance can be sections into three parts, which may each form a component of an overall M&A financing package:
Cash Financing
This is using the current cash assets of the acquiring company to purchase the target company.
Entire cash financing is the simplest form of M&A finance but is rarely possible, and even if it is, can represent a poorer option as the pressure it puts on the company capital and business cash flow in the short- to mid-term is often disadvantageous.
Attempts at entire cash M&A financing soon lean into further debt financing to keep the company running once the acquisition has taken place, sometimes resulting in using short-term debt finance, revolving credit facilities, and other business finance options that ultimately result in more expensive solutions.
Thus, even if the business has the capital to perform a fully cash-financed M&A, it is rarely advisable to do so. A comprehensive M&A finance strategy will incorporate a potentially-significant portion of cash financing if available, but will still factor in other M&A finance options for a healthier overall funding package.
Equity Financing
In many M&A frameworks, equity finance will form a portion of the overall M&A finance solution. Equity finance can be structured in a wide variety of configurations, and is especially valuable in collaborative merger ventures.
In most mergers, the structuring of shares comprises the very basis of the overall solution.
A merger is a voluntary joining of two companies and thus the ownership of the new entity, where shares in the new corporation are beneficially assigned to the previous stakeholders of both original businesses. While such a share allocation may not represent the easy-understood model of equity finance where cash capital is provided in return for equity, it is nonetheless a similar setup that yields an identical result.
For company acquisitions, the use of equity finance can be more nuanced. Here, equity in the takeover business may be offered as part of the overall company purchase, or sold to third-party investors to provide capital in a traditional manner, with this new capital financing part (or all) of the acquisition.
Debt Financing
Reaching out to banks and other lenders to provide the funds needed to acquire the target company typically forms a significant portion of the overall M&A finance package.
Debt financing has many powerful advantages for those looking to fund a merger or acquisition, not least its non-dilutive nature, providing current shareholders with the power to undertake the venture without long-term impact on their existing investment.
The variety of debt financing also provides strong incentive for its use; typically there are several solutions available that can come together to perfectly fit the M&A configuration.
These include:
Secured asset-based finance
When undertaking an acquisition, the target company will come with its own assets.
If these are not already leveraged, they can form a powerful component in obtaining senior asset-based financing. When combined with existing assets, a comprehensive package of secured senior debt can be obtained that takes advantage of low rates and a comfortable mid- to long-term repayment schedule.
Mezzanine finance
Subordinated debt, while it comes with higher rates than senior debt, can form a significant part in the financing for a merger or acquisition. Mezzanine finance with appropriate equity warrants can raise significant levels of funding and provide the needed purchasing power.
Bridging loans
Designed to take advantage of opportunities in the business lifecycle, business bridging loans provide companies the funds necessary to move quickly, which is especially relevant when looking to acquire businesses that have entered into liquidation.
Often these rapid acquisitions can yield substantial reward for the entrepreneur willing to take the risk.
Revolving credit facilities
M&A finance requires both immediate capital for the business purchase, and short- to mid-term finance to smooth the transitory period that follows the merger.
Ensuring that effective revolving lines of credit are in place to provide comprehensive cash flow support in those first months is essential in undertaking a successful M&A project.
Junk bonds
High-yield (or “junk”) bonds provide a means for companies with weaker business credit ratings to access the level of funds required for an acquisition, offering investors a positive risk-to-return ratio for their capital without the core business having to offer dilutive shares.
Convertible debt
Combining aspects of debt finance and equity finance, convertible debt offers lower rates than traditional loans with an option for the lender to convert remaining debt into company equity should the business share value increase.
With benefits for both lender and borrower, convertible debt often plays a valuable role in M&A finance for UK companies.
Recent Business Finance Case Studies
The Costs of Mergers and Acquisitions
While the cost of purchasing the target company forms the substantial majority of the cost of an M&A undertaking, it is not the sole expense.
Companies must take care to consider the following additional expenses when determining the level of M&A finance required:
- Valuation - Both the acquiring business and the target business will need to be properly and independently valued. Company valuations can be extremely complex and a professional valuer will use several methods to arrive at a fair market price, including Discounted Cash Flow (DCF), comparable company analysis, and market precedents.
- Due diligence - It is crucial that analysis is undertaken to assess the target’s financial health, legal position, operational efficiency and other factors to evaluate the potential risks.
- Regulatory compliance - There is a wide range of regulations that UK businesses must consider when embarking in a merger or acquisition. These include Competition and Markets Authority (CMA) approval, takeover code compliance, FCA regulations, data protection compliance, tax considerations and more.
- Human resources - A key aspect to any merger or acquisition is in managing the people that formed the target company. Expert talent should be retained, while some roles will be streamlined and lead to redundancies. The input of human resources is typically considerable.
- Infrastructure - A combination of existing infrastructure reassessment and reassignment will occur alongside potentially new infrastructure to improve the overall operational efficiency of the new merged company.
- Rebranding - Presenting the new merged company to clients and the public will require an investment in marketing.
- Company culture - Additional funds and resources will need to be allocated to ensure that the culture and relationships within both companies are competently aligned.
- Training - A period of training for key personnel on both sides of any merger or acquisition venture will be required.
Tailoring M&A Finance with Clifton Private Finance
M&A deals are complex operations that may be undertaken for several different reasons. This can include:
- growth strategies where companies are looking to gain access to new markets or integrate innovative products;
- synergy initiatives where a merger can improve efficiency and cost-effectiveness;
- business risk reduction through diversification;
- to eliminate competition through the aggressive takeover of a rival company;
- or simply to take advantage of an opportunity to obtain the assets of a company facing liquidation.
Seeking the advice of industry specialists is essential - Clifton Private Finance can provide your business with a team of experts, drawing on specialist knowledge in each of the finance products available and combining that expertise to build a comprehensive solution that’s customised to your precise business need.
Speak to Clifton Private Finance today to discover the options available to your business that will ensure a smooth and successful M&A operation.
