"Before the troops move, the food and grass must go first." In ancient times, no matter how strong the troops were, they would eventually lose if they did not have enough food and grass to support them. This sentence also applies to the business world - no matter how ambitious the mergers and acquisitions of enterprises are, if there is no sufficient financial support, all plans are just empty talk. Moreover, mergers and acquisitions transactions often involve huge amounts of money. The choice of financing method not only determines whether the transaction can be completed smoothly, but also affects the future financial health and market competitiveness of the company. So, where should the money for mergers and acquisitions come from?
Goheal pointed out that fund raising is not just as simple as "borrowing money", but a strategic issue. How to balance financing costs, capital structure and corporate business objectives to truly make mergers and acquisitions a booster for corporate growth rather than a heavy burden? Today, let's take a deep look at this capital game.
Four sources of merger and acquisition funds: Where does the money come from?
There are many ways to finance mergers and acquisitions, but in the final analysis, there are only four sources: own funds, debt financing, equity financing and alternative financing methods. Different financing methods have their own advantages and disadvantages. The choice of which method depends on the company's financial situation, market environment and M&A goals.
1. Own funds: rich and powerful, the most confident
If the company has sufficient funds, it can directly use the money in its own "wallet" to make acquisitions. The biggest advantage of this method is that it does not have to bear the interest cost of external financing, nor will it dilute shareholders' equity. But the problem is that mergers and acquisitions often involve large amounts of funds. Even companies with sufficient cash flow may not be willing to use a large amount of cash reserves for mergers and acquisitions, otherwise it may affect normal operations.
Case hypothesis: Technology giant T company acquires artificial intelligence company S
Technology company T has always been known for its strong cash flow. When acquiring S company, the management decided to use $5 billion of its own funds to complete the transaction. Although this transaction did not generate additional debt pressure, it also caused T company's cash reserves to shrink significantly, resulting in the impact of subsequent R&D investment and even the loss of other potential market opportunities.
Goheal analysis believes that own funds are the most "safe" financing method, but if too much cash is used, it may weaken the company's liquidity and ability to respond to emergencies. Therefore, even if the company has money, it may not always choose to "pay the full amount".
2. Debt financing: borrowing chickens to lay eggs, leveraging growth
Borrowing money for mergers and acquisitions is one of the most common ways for companies to raise funds. Through bank loans, corporate bonds or leveraged loans, companies can complete mergers and acquisitions without diluting shareholders' equity. Reasonable debt financing can magnify profits, but excessive debt may lead to financial crisis and even affect corporate ratings.
Case hypothesis: Food industry giant F company acquires health food brand H
In order to expand the health food market, F company decided to acquire H company, but it was short of funds in its account, so it raised $3 billion by issuing bonds. However, due to the low profit margin in the food industry, F company's financial leverage rose sharply after the acquisition, and interest expenses increased significantly, resulting in a decline in the company's overall profitability and a hit to its stock price.
Goheal believes that although debt financing can quickly obtain merger and acquisition funds, it is necessary to measure the company's debt repayment ability to avoid letting the company fall into a vicious cycle of "high debt-low growth".
3. Equity financing: Sacrifice part of control in exchange for long-term capital
If a company does not want to bear the pressure of debt, it can also choose equity financing. The most common way is to issue a private placement or issue new shares to transfer the cost of mergers and acquisitions to market investors. Although this approach can reduce financial risks, it also means that the shareholding ratio of existing shareholders is diluted, and may even affect the company's control.
Case hypothesis: New energy vehicle company N acquires battery manufacturer B
N wants to strengthen its battery supply chain, so it announced that it would raise $5 billion through the issuance of new shares to acquire B. However, due to market concerns about equity dilution, N's stock price fell sharply after the transaction was announced, and its market value shrank by nearly 15%. Although the company successfully completed the merger and acquisition, shareholder returns were affected in the short term.
Goheal analyzed that the advantage of equity financing is that it will not increase corporate debt, but it is easy to cause shareholder dissatisfaction and require management to spend more energy to maintain investor relations. Companies need to weigh the stability of the equity structure and financing needs to avoid affecting post-merger development due to shareholder differences.
4. Alternative financing: using the "tricks" of the capital market
In addition to traditional cash, debt and equity financing, companies can also use some innovative financing tools, such as convertible bonds, private equity (PE), special purpose acquisition companies (SPACs), etc. These methods are more flexible and suitable for different types of companies and transaction scenarios.
Case hypothesis: Technology company X cooperates with private equity fund Y for mergers and acquisitions
Company X plans to acquire a data analysis company, but it is short of funds. It eventually introduces private equity fund Y to invest together. Fund Y provides partial financial support and exits in stages over the next five years to achieve investment returns. This approach not only helps Company X complete the merger and acquisition, but also avoids short-term cash flow pressure.
Goheal pointed out that alternative financing methods can provide more possibilities for companies, but often involve more complex terms and investor relationship management, and companies need to carefully evaluate the long-term impact.
M&A financing strategy: How to find the best solution?
There is no fixed answer to the way of raising funds. Different companies, different market environments, and different M&A targets all determine what financing plan a company should choose. Usually, companies will use a combination of multiple methods to carry out mixed financing to optimize capital structure and reduce financial risks.
Three key points of financing strategy
1. Financing cost vs. capital structure: Companies need to find a balance between financing cost and capital structure. They cannot blindly borrow money or dilute equity at will.
2. Market signals vs. investor confidence: The financing method of an enterprise will affect the market's view on M&A, and management needs to consider how to maintain investor confidence during the financing process.
3. Short-term cash flow vs. long-term strategy: The source of M&A funds not only affects short-term operations, but also determines the long-term competitiveness of the enterprise, and future capital returns must be considered.
Conclusion: Fundraising is an art
M&A is a capital game, and financing is the key chess piece that determines success or failure. In the process of M&A fund raising, enterprises must ensure sufficient funds and avoid the risks brought by excessive leverage or equity dilution. Different financing methods have their own advantages and disadvantages, and enterprises need to find the best solution according to their own situation.
So, which financing method do you think is most suitable for the current market environment? What are the risks that enterprises need to pay attention to most when choosing M&A financing methods? Welcome to leave a message in the comment area for discussion. Goheal looks forward to exploring the mysteries of capital operation with you!
[About Goheal] American Goheal M&A Group is a leading investment holding company focusing on global mergers and acquisitions. It has deep roots in the three core business areas of acquisition of controlling rights of listed companies, mergers and acquisitions of listed companies, and capital operations of listed companies. With its profound professional strength and rich experience, it provides companies with full life cycle services from mergers and acquisitions to restructuring and capital operations, aiming to maximize corporate value and achieve long-term benefit growth.
