Transaction Financing Advisory
Debt vs. Equity
Debt:
- M&A transactions sometimes require financing and buyers must carefully weigh their financing options to ensure a successful acquisition.
- Two of the most common forms of financing for acquisitions are the use of debt or the issuance of equity to fund the acquisition.
The benefits of using debt to finance M&A transactions include:
- The cost of capital is relatively low considering central banks project keeping interest rates close to 0% for the foreseeable future.
- Tax benefits because the interest payments are tax deductible
- Increased leverage can also boost a company’s return on equity.
- No additional shares are issued and so there is no dilution of ownership.
Negative Aspects of Debt Financing:
- Issuance of too much debt will hurt the company’s credit rating which would hinder its ability to borrow money in the future and would lead to an increase in the company’s cost of debt.
- Debt issuance may also be limited by existing lender covenants that set a restriction on the amount of debt the firm can assume.
Equity Financing:
Using equity as currency in exchange for partial or whole ownership interest in a company is another medium of exchange that can be used to finance equity transactions.
When equity financing is utilized, a buyer can either offer its stock to the target firm’s shareholders or offer cash, which would be generated by the proceeds from an equity offering.
The positives aspects of equity financing include:
- No mandatory interest payments that would be Applicable on Debt
- No principal that must be repaid
- No restrictive covenants related to its issuance.
The negative aspects of financing using equity include:
- Equity valuations can change either negatively or positively thereby affecting the valuation at which equity was issued
- Conversion of Equity to cash cumbersome depending on levels of liquidity