M&A finance

Nov, 05 2020

The M&A market is one of the most effective tools for business development. M&A deals help expand the business, improve its production performance, and enter new markets. In addition, M&A increase the competitiveness and profitability of the business. However, such transactions are often carried out by companies that already have the financial and technological capabilities to expand their own production or invest in development.

And however, M&A deals involve a lot of risks, especially when it comes to multinational contracts. The effectiveness of such operations largely depends on the quality of planning and optimization of funding sources. Preparing for a transaction is of great importance, as it requires a thorough analysis of the internal and external environment of the company, identifying the weaknesses of the business and evaluating the opportunities for its further development.

Stages of planning mergers and acquisitions

If business owners decide to conduct an M&A transaction for external transformation, they will need the help of qualified lawyers and experts. Planning mergers and acquisitions is the most important stage that lays the Foundation for further profitability and competitiveness of the enterprise.

The first stage of planning is due diligence of the absorbed company. Experts should check its financial, economic, and legal status and make sure that there will be no further conflicts with local authorities. Pre-verification involves calculating the market value of the business you are planning to buy. It is impossible to calculate this figure without access to the company’s documentation because verification always implies the conclusion of a non-disclosure agreement.

The second stage is negotiations with the management of the absorbed company. At this stage, business owners may also need the qualified help of experts who can formulate and defend the most favorable conditions.

The next stage is the conclusion of an agreement of intent. After that, analysts can access the reports of the company that will become part of the business. And if before experts could only name the approximate market value of the enterprise, now they will determine the objective market price of the absorbed company and calculate different options for its value.

Based on the analysis of financial statements and accounts, experts develop the optimal transaction structure. The parties will have to agree on it, as well as determine the method of transferring property, clarify the procedure for actions, and take care of ensuring the fulfillment of obligations.

How is the financing of mergers and acquisitions

The question of funding arises at the earliest stages of planning. When they determine whether the transaction is justified to develop the company, they also discuss the potential ability to implement this transaction. After completing the due diligence stage and determining the price of the absorbed company, it becomes possible to more accurately estimate the amount of funds required for the purchase.

To determine the amount of Finance required for a transaction, experts consider several factors. Important of them are:

  • availability of debt obligations;
  • the value of the shares and assets of the absorbed company;
  • expenses related to the preparation and execution of the transaction itself;
  • business needs for working capital.

It is important to determine what volume of financing of mergers and acquisitions required. Only then can you proceed to optimize it. This procedure is aimed at reducing the amount of capital required for the transaction, and at the same time finding suitable sources of financing.

The most attractive scheme for the buyer to pay for the cost of external sources of financing is their payment using cash flows from the acquired company. However, in practice, this scheme does not always work, so initially the buyer must pay with borrowed or borrowed funds. This can increase the risk of insolvency, reduce the profitability of the business and reduce its estimated cost by reducing the amount of net cash, which is why it is so important to optimize transaction financing wisely.

There are different ways to find funds for an M&A transaction. Each of them helps to optimize the process considering the economic situation and internal characteristics of the companies involved in the transaction.

Sources of financing for mergers and acquisitions

  • The company’s own funds. This is the most expensive method, but it eliminates interest payments, reduces time frames, and does not require business transparency for a specific transaction. Companies do not often use their own capital, but this source of financing has the least risk.
  • Loans and funds raised. This method has its drawbacks, as the business becomes dependent on creditors. Before contacting the Bank, you should calculate what the situation will be in the company in a few years, whether it is worth taking risks and getting involved in long-term debt obligations. Of course, it is impossible to foresee everything, but you should also consider force-majeure. For example, does the business have enough margin of safety to withstand them if there are loans.

The most popular source of financing for M&A transactions is Bank lending. However, loans provided by banks are associated with high risks. They are always long-term, so the business becomes more vulnerable and dependent on currency fluctuations, the position of the lender.

M&A transactions require the assistance of lawyers with many years of experience in this field. It is desirable that they accompany the transaction from start to finish, but you can also involve experts at certain stages. Together with the Finance Department, they draw up a plan to optimize the financing of mergers and acquisitions and help with its implementation.

Author of the article

M&A finance
Kirill Chemlaev
Senior Lawyer

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