Takeover financing means exactly what it sounds like. It provides capital for someone to gain control of another corporation using stocks to gain the control.
Like it or not, takeovers have become an established part of today's business environment.
Your opinion of takeovers may depend on which side of the transaction your company occupies. But if you should ever find yourself in a position to take over another company, have you thought about how you would finance the deal?
Financing a takeover is similar to financing any other business purchase. However, takeovers also present some unique challenges and opportunities. Before you decide whether or not a takeover scenario is right for your business, here are just some of the financing issues you need to be aware of . . .
Making the Bid
Traditionally, when someone decides to make a bid on a company, the company's board of directors is informed in advance. If the board feels that the takeover is beneficial to the shareholders, it will approve the takeover bid and recommend its acceptance by the shareholders. That's called a friendly takeover. But if the board doesn't recommend the takeover or if the purchaser doesn't inform the board of his intentions, then the takeover is considered hostile. The difference between a friendly and hostile takeover may seem semantic, but it can significant ramifications, especially in the area of financing.
Cash is the most common form of payment in a takeover. The strongest purchasing position is when the buyer has the financial resources to purchase controlling equity outright. But buyers rarely have that kind of cash lying around, so they are forced to raise cash through financing arrangements with banks or by issuing bonds. If bank financing is required, the issue of whether the takeover is hostile or friendly takes center stage. If it is a friendly takeover, the process of acquiring due diligence is relatively easy since the company's board is usually willing to provide as much information as the bank requires to make an informed decision. But if the takeover is hostile, the company will adamantly resist requests for information and the due diligence process will be strictly limited to publicly available information. Since banks are hesitant to provide loans for companies they know little about, it is very difficult to obtain takeover financing from a bank unless the takeover is a friendly one.
Loan Note Alternatives
If the company being taken over is a publicly traded company, it might be possible to offer shareholders loan notes as an alternative to cash. From the purchaser's standpoint, this reduces the amount of cash that is needed to close the deal. But shareholders also receive a tax benefit because loan notes defer the capital gains liability of the purchase.
All Share Deals
When a smaller company acquires a larger company, there is also the possibility of orchestrating an all share deal. Instead of cash, the purchaser issues new shares to the shareholders of the company being acquired. The shareholders receive majority ownership of the merged, larger company, while the acquiring company gains management rights of the new corporation. Additionally, the purchasing company receives the advantage of a publicly traded company without having to navigate the process of an IPO.
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