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Investments and financing play a crucial role in the world of mergers and acquisitions.
M&A transactions involve one company buying another company or merging with it. The financing aspects are integral to the success and execution of these transactions in all sectors. Successful mergers and acquisitions require careful consideration of financing options, aligned with the strategic goals of the acquiring company, to create value and drive growth while managing risks.
This always involves collaboration with experienced financial advisors, legal experts, and other professionals to navigate the complexities of the M&A process.
The essence of mergers and acquisitions in modern business
In economic science, there is a widespread opinion that a merger is a process of combining companies, as a result of which a new company is created, which is the legal successor, and an acquisition is in fact a purchase by one company of another.Mergers and acquisitions of companies are always determined by certain reasons that lead to them.
There are several reasons for mergers and acquisitions of medium and large companies:
1. Expansion of the geographical area of business activity.
2. Cost reduction by closing duplicate departments.
3. Increasing the resource base and access to new resources.
4. Attempts by big business to monopolize the market.
5. Increase of company capital.
6. Economies of scale.
As practice shows, for the reasons listed above, small companies most often pursue the goal of increasing capital and expanding the geographical area of activity. Mergers and acquisitions occur quite often with the participation of foreign capital, as evidenced by the share of foreign capital in the equity capital of leading companies in many sectors of developing countries.
Table: Mergers and acquisitions have both advantages and disadvantages.
| Advantages of mergers and acquisitions | Disadvantages of mergers and acquisitions |
| Economies of scale | Inconsistency of business goals |
| Savings of financial resources due to the reduction of transaction costs | The complexity of managing a large company compared to a small one |
| Strengthening of competitive positions | Clash of different management styles |
| Increasing the scope of business activity | Hidden motives in one of the parties |
| Access to additional resources | Significant costs of mergers and acquisitions |
| Improving the quality of products and services | Probability of mistrust between partners |
| Development of new markets, especially in the case of multinational companies | The probability of negative consequences as a result of a change in management. |
| Reduction of risks and their diversification | The riskiness of M&A processes |
According to the above-listed characteristics, mergers and acquisitions are processes that can both improve the work of companies and create additional difficulties for them.
A merger and acquisition of banks can be called successful if it meets a number of conditions listed below:
• Correctly set goals for M&A.
• Correctly selected target company for business connection.
• Reliable access to long-term financing (for example, a commercial bank loan) in the required quantities, guaranteed before the start of the transaction.
• Each technical step of the process is carefully planned and checked by highly qualified specialists with relevant experience.
• The tasks that need to be completed are initially fully consistent with the strategic goals of the business and specific conditions.
• Comprehensive supervision and effective management after the transaction.
If the merger and acquisition transaction is perfectly planned and successfully carried out taking into account the above conditions, then the newly created company will become more competitive and sustainable, since it will operate with greater resources, experience and client base.
Mergers and acquisitions on an international scale
Currently, multinational companies occupy an important place in the global economy.The strategy of such companies is characterized by their zeal to expand their activities, improve their competitive positions on a global scale, and conquer new markets. Investment activities of multinational companies are often carried out on the basis of M&A agreements.
Cross-border mergers and acquisitions are one of the fastest ways for companies to grow.
Such transactions are also often carried out at the national and regional level, in some cases leading to profound changes in entire sectors.
At the regional level, M&A transactions often involve small and medium-sized enterprises that want to strengthen their position in a particular region or expand their range of products and services. These transactions can support business growth, increased competitiveness and increased access to local customers.
At both the national and regional levels, M&A transactions can have a significant impact on the economic situation, competition and employment in a region or country. They require careful strategic work on the part of all participants and are often subject to government regulation to ensure fair competition and protect consumer interests.
The current stage of the global M&A market has a number of certain new characteristic features:
• Mergers mainly occur in highly monopolized industries and in significantly larger volumes. This requires attracting huge resources and careful consideration of financial options.
• The companies initiating M&A are private, collective, sovereign funds or large corporations from countries that supply raw materials to the world market and owners of cheap labor (for example, the countries of the Middle East, India and China).
• In moments of crisis, a large number of potential targets for mergers and acquisitions around the world appear, in the form of companies whose market value has sharply decreased. At the same time, many companies acquire a fair (not inflated) price.
• Alliances have increasingly been formed to implement international M&A agreements.
The global leading countries in M&A transactions include the United States, China, the United Kingdom, Canada, Germany, Japan, France, Australia and others.
However, the role of developing countries continues to grow rapidly. This is facilitated, among other things, by the accumulation of significant capital and improved access of local companies to global financial markets.
The role of investments and reliable financing in M&A
Financing is the bedrock upon which Mergers and Acquisitions transactions are built. In the world of M&A, it is the assurance that the necessary funds will be available when needed to execute the deal.This reliability is vital in enabling the acquisition or merger to move forward as planned.
In essence, reliable financing ensures that the acquiring company has the wherewithal to fulfill its commitments and bring the transaction to conclusion. This includes covering the purchase price of the target company, addressing transaction-related costs, and dealing with any unexpected contingencies that may arise during the process.
Moreover, having access to dependable financing can confer a competitive edge in the highly competitive M&A landscape.
It enables the acquiring entity to act swiftly and assertively when attractive opportunities arise.
In contrast, uncertain financing options often lead to delays and potentially missed opportunities, as deals often involve tight timelines and competitive pressures.
Additionally, the credibility and reputation of the acquiring company is at stake. Reliable financing not only demonstrates financial strength but also fosters trust among stakeholders, including target companies, shareholders, lenders, and regulatory authorities. It sends a signal that the company is committed to the deal and has the financial instruments to see it through.
Smooth financing of the M&A process
As we can see, financing plays a pivotal role in mergers and acquisitions, impacting various aspects of the deal. Below we have listed the key roles financing plays in M&A transactions.Fund acquisition costs
Financing is essential for covering the acquisition costs. These costs include the purchase price of the target company, transaction fees, legal expenses, due diligence costs, and other associated fees. Financing ensures that the acquirer has the necessary funds to complete the transaction.Deal structure
The choice of financing sources and models influences the deal structure. Whether the acquirer uses cash, stock, debt, or a combination of these will affect the terms of the deal, ownership distribution, and the level of control the acquirer retains.Leveraged buyouts
In large M&A transactions, debt financing is often a significant component, especially in leveraged buyouts. In an LBO, the acquirer uses a substantial amount of debt to finance the purchase, with the target company's assets often serving as collateral. This approach can amplify returns but also increases financial risk that accompanies any transaction.Optimizing capital structure
Financing decisions significantly impact overall capital structure of the acquiring company. This includes the mix of equity and debt used to fund the acquisition deal. Rational and well-balanced capital structure helps manage risk and maximize returns.Minimize dilution
If an acquirer uses its own stock to finance the deal, the goal is often to minimize “dilution” for existing shareholders. Careful consideration of the exchange ratio can help achieve this objective.Assessing debt capacity
Assessing the acquirer's debt capacity is critically important. An over-leveraged acquisition can lead to financial instability and credit rating downgrades. Financial advisors often perform stress tests to determine how much debt the acquirer can safely take on.Negotiating financing terms
Negotiating favorable financing terms, such as interest rates, covenants, maturity, and repayment terms, is crucial to ensure that the financing is effective and manageable for the acquiring company.Transaction risk management
Large-scale financial decisions also involve risk management. Acquirers must consider the impact of the debt on their cash flow, interest rate exposure, and potential risks associated with the target company, including contingent liabilities.Integration costs
Sometimes financing also covers the costs associated with integrating the target company into the acquirer's operations. This can include expenses related to merging information systems, employee retention programs, and other integration-related costs.Post-merger operations
Once the acquisition is complete, financing and investments play a role in funding ongoing operations, working capital needs, and any capital expenditures required to support new entity.
Stakeholder communication
How the deal is financed can affect how the transaction is perceived by shareholders, creditors, and other stakeholders. Effective communication and transparency are essential to maintain confidence in the company's financial health.Regulatory and legal compliance
Financing arrangements must comply with local and international regulatory / legal requirements, including securities laws, antitrust regulations, and tax implications. Failing to do sometimes can have significant legal and financial consequences at the entire business level.The role of smooth financing and investments in M&A deals cannot be overstated. It underpins the entire process, enabling the execution of deals, providing a competitive edge, enhancing credibility, and contributing to prudent risk management. In a landscape where financial certainty is paramount, reliable financing is the linchpin that holds M&A processes together.
Legal and financial support for M&A transactions
Issues related to M&A transactions occupy a prominent place in professional and business publications, and the provision of this type of service is increasingly common in a globalized world. Specialists focus not only on planning and financing issues, but also on the legal aspects of transactions and cooperation between different teams.Collaboration between consultants
Large agreements are usually worked on not only by financiers and lawyers of the initiating company.Typically, the project will also involve third-party financial advisors and, in some cases, technical consultants who specialize in the relevant industries. In large-scale projects, it is critical to maintain constant communication between different teams. Although this seems obvious, in practice problems sometimes arise in this aspect.
Often, at the initial stage of reviewing the acquired company, each team works in information isolation or lacks effective interaction with other teams. The problem is that later in the work it may not be possible to make further adjustments, which may result in poor audit results being provided.
In particular, the legal team should analyze the findings of financial and technical experts in a comprehensive manner. Conversely, financial advisors can use risks identified by lawyers in negotiations to reduce the cost of a deal. Joint participation in the negotiations and conclusion of the purchase and sale agreement and other related documents greatly simplifies the process.
Our company is ready to provide experienced specialists in the relevant field, since the assessment of some risks associated with assets is impossible from a purely legal or technical point of view.
Financial planning from A to Z
Supporting M&A transactions usually does not boil down to preparing a report based on the results of an inspection and writing a purchase and sale agreement.Typically, agreement support includes other elements, including the following:
• Initial communication on key terms of the agreement.
• Preparation of a memorandum of intent or similar documents.
• Tax and corporate structuring of agreements.
• Obtaining the necessary licenses and permits.
• Post-agreement integration elements.
This can also include agreeing on the terms of joint activities and developing tools for joint control. The latter is very important if the agreement provides for further joint activities of participants.
The advisor should agree with the client and counterparty on the roadmap for the transaction from the very beginning to avoid complications and delays in the future. This should be a vision of the main complications that may affect the implementation of the agreement, particularly in the context of time and additional costs, and which should be reflected in the transaction documents. This service can be provided by our specialized teams who have relevant experience.
Of course, all issues of financing M&A transactions cannot be accurately assessed at the very early stage of process, but at least there should be a vision of the key points.
For example, if choosing a certain financial option will obviously result in a significant tax burden, this should be taken into account immediately. Of course, developing alternative options for financing a transaction will take time, but consultants should foresee potential problems and solutions already at the initial stages.
As we can see, reliable and continuous financing is a critical element in mergers and aquisitions, shaping the deal structure, determining financial health of the post-acquisition entity, and managing risks.
Successful M&A financing requires careful planning, analysis, and consideration of the strategic objectives and financial capabilities of the acquiring company.
