Financing strategies for successful dealmaking

Munish Sharma of Dua Associates examines the range of funding options available for mergers and acquisitions

There is a vast range of options available to finance an M&A transaction, from a simple equity financing to a layered transaction with multiple levels of debt and equity. Overall, the key factors that affect financing structures are size, complexity of the transaction, acquirer’s cash position, market for the acquirer’s securities, the terms of the purchase price and above all, the local and/or global financial environment.

In many cases, the availability of funding is determined by the target being acquired. A target with little debt, significant assets and strong, predictable cash flows is an excellent candidate for long-term financing. On the contrary, financing options are restricted if the target has poor cash flows, high debt levels and encumbered assets.

Mergers v acquisitions

A merger is the formation by two separate entities of a single company that would be jointly owned and perhaps jointly operated by two merging entities. In several jurisdictions, a merger is achieved through a court process. The resultant entity usually takes over all the contractual and statutory liabilities, obligations and business of the merging entities and issues shares to shareholders of this merged entity. The financing required in a traditional merger is not very significant, unless the resultant entity has also agreed to pay a cash consideration to the shareholders of the merging entities.

Munish Sharma is a partner at Dua Associates in New Delhi. He can be reached at munish@duaassociates.com.