Corporate mergers and acquisitions have a number of inherent benefits that allow business enterprises to expand in both size and scope. Moreover, such businesses are able to reduce costs through synergies with the newly acquired corporate enterprise. However, business merger and acquisition professional Ryan Binkley of Generational Equity says that corporate mergers and acquisitions are normally very expensive and without sufficient cash resources, companies may have to opt for other methods to finance such corporate mergers and acquisition transactions. The mode of finance that the company will choose to pay for the merger or acquisition depends upon financial state of the company, the overall activity after the merger or acquisition and the finances available at the time of payment of the transaction.
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Exchanging stock: The most common mode of financing corporate merger and acquisition transactions is by paying stocks to the shareholders of the selling company. According to the Ryan Binkley Generational Equity team Financing mergers and acquisitions through stock is safe option for both the buying and selling companies as shareholders of both the companies share the risk of the venture to guarantee careful management. Paying stock to the shareholders of the selling company benefits the buying company if the market value of its shares is high, as it will receive more stock from the selling company per share exchanged.
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Taking on debt: Agreeing to take on the debts that the selling company owes to outsiders is an ideal way to financial a merger or acquisition as an alternative to paying cash or in stocks. A company’s debt reduces it sale value considerably and can eliminate its price. Moreover, investing in a company’s bond and becoming the main creditor in the process is a good option when the selling company is in bankruptcy. By controlling a major portion of the company’s debt, buying company has more control over the selling company’s management even in the case of liquidation.
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Paying cash: Paying cash to the shareholders of the selling company is the obviously the best substitute to paying the shareholders in stock. Cash transactions are instant, simple and mess-free. This mode of financing does not require any kind of complicated management unlike paying shareholders in stock; its value is less volatile and does not depend upon the company’s performance.
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Initial Public Offer (IPO): Initial Public offerings are a convenient way to raise money from the public to finance a merger or acquisition transaction. The prospect of a merger or acquisition can excite potential investors to invest their money in a lucrative investment. Moreover, an increasing value of an IPO with the prospect of a merger or acquisition can increase the value of existing shares in the market.
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Loans: For the buying company, borrowing money can be an expensive option when undergoing a merger or acquisition. Both the lender and owners may have to agree to accept the payment for their loans over a extended period and demand interest payments for their loans. Even when the interest payments are a small percentage of the merger or acquisition transaction cost, the total cost to the borrower can be enormous
The Ryan Binkley Generational Equity team says that it is important for business owners to understand the above points to make the transactions effective.