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successful M&A. Method of payments includes leverage payment, cash
Anushka Saxena Feb 03, 2024
payment, & security payment. The different payment methods have
different influences on the capital structure, financial status, & controlling of
the purchasing entity after the mergers & acquisitions. Method of payment
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Cash Payment
This payment method is extensively used across all business domains owing to its
simplicity and transparency. For companies, putting cash upfront seems more reliable and
straightforward as compared to other payment methods. Although cash is the most viable
payment method, it loses its relevancy when the transaction costs are too high.
Security Payment
Security payment refers to a payment method under which the purchasing firm rolled
out new securities for buying the assets or shares of the target firms. It includes the
given forms:-
Share Payment
With such payment, the purchasing firm rolled out new stocks for buying the assets or
stocks of the target companies. Among which, the most widely-used form is the share
exchange through which purchasing firm pays the share directly to the target company to
buyout assets and stock.
Bond Payment
With bond payment, the purchasing firms issue corporate bonds to purchase the assets or
share of the target companies. As a payment method with M&A, this category of bonds
has a higher credit rating and negotiability.
Leveraged buyout refers to a payment method through which purchasing firms finance
capital with M&A via increasing debts. Under this payment method, the purchasing firms
take the future operating cash flow of the target firms as pledges to raise debts to finance
capital via investors and then buy out the target firms’ ownership with cash payment.
When contrasted with bond payment, LOB leads to a higher capital cost, as bank
loans’ interest is significantly higher than the corporate bonds.
Read our article: Merger or Amalgamation of Company with Foreign Company: Complete
Overview
There are various types of M&A (merger and Acquisition) transactions. A merger is
commonly classified as statutory, where the target is entirely fused into the acquirer by
dissolving all of its assets; consolidation, where the two firms integrate to become a new
firm, or subsidiary, where the target turns into an acquirer’s subsidiary. Amidst the
acquisition process, the acquirer might strive to buy out the target firm in a friendly
takeover or hostile takeover.
Horizontal Merger
A horizontal merger comes to light when firms operating in a similar industry combine
together. This merger aims to utilize economies of scale & exploit cost-based synergies
effectively.
Note: Cost synergy refers to a saving in operating costs anticipated after the merger of two
firms. Cost synergies are cost reductions owing to the increased efficacies in the combined firm.
Vertical Merger
A Vertical merger refers to a merger of two or more firms that provide multiple supply
chain functions for a common service or good. Generally, the merger is effected to
escalate synergies, acquire more control of the supply chain process, and increase its
footprint.
Conglomerate Merger
A Conglomerate Merger refers to a merger between organizations that are engaged with
different business activities. A conglomerate merger includes companies serving different
operation areas, while mixed conglomerate mergers include firms seeking market or
product extensions.
A market extension merger takes place between two firms that deal in the same products
but in different markets. The main aim of the market extension merger is to ensure that
the merging companies can get access to a bigger marketplace.
A product extension merger takes place between two firms that deal in products that are
identical & operate in the same market. The product extension merger enables the
merging companies to group together their products & get access to a bigger market. This
makes sure that they earn higher profits.
A firm can be purchased using stock, cash, or a mix of the two. Share purchases are
widely known as a form of Acquisition; however, the greater the management believes in
the Acquisition, the more they will wish to pay for stocks in cash. This is because the
management strongly thinks the shares will ultimately be worth more than any other
form of assets after synergies are realized from the merger.
Given this, the target firm will wish to be paid in stock. If payment is made via stock, the
target firm turns into a partial owner in the acquirer and a beneficiary of expected
synergies. Conversely, weak clarification of an acquirer about the target’s valuation would
lead to sharing risks with the seller. Therefore, the acquirers will intent to pay in stock.
The company should take various factors into account when preparing an offer.
These factors include tax implications, impact on the structure, transaction cost, and
other
bidders’ presence, the target’s intent to sell & payment preference.
Once the bid is placed before the seller, the public can reap productive information about
how insiders of the acquiring firm see the stock’s value, the value of the target, and the
positivity they have in their ability to perceive value via a merger.
Market conditions play a crucial role in merger and acquisition transactions. When an
acquirer’s shares are overvalued, management might pay with an exchange of share for
stock. These shares are fundamentally deemed a form of currency 몭1 몭.
Since the shares are considered to price relatively higher than their existing value, the
acquirer is getting more profit by paying with stock. If the acquirer’s share is considered
undervalued, the management might end up paying for the Acquisition with cash. By
considering share as equivalent to currency, it would acquire more shares trading at a
discount equivalent to intrinsic value to pay for the purchase.
In reality, there may be some additional factors as to why a company would opt to pay
with share or cash, and why the Acquisition is being considered (i.e., acquiring a
company with tax losses so that the same can be recognized promptly, and the tax
liability of the acquirer is reduced drastically.
In a merger, two firms enter into a contract to form a new entity; in an acquisition,
How an M&A is paid often discloses how an acquirer sees the relative value of the share
M&A (merger and Acquisition) can be paid by equity, cash, or a combination of the two.
Conclusion
Where cash is not practically applicable, there are other ways to finance an M&A, many
of which result in a seamless transaction. The best payment alternative to use depends
on the seller and the buyers their respective asset values, share situations, and debt
liabilities. Each method of financing an M&A comes with its own risks and commitments,
and it is the parties’ responsibility to leverage due diligence during a transaction.
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