The process that a company follows in acquiring the necessary funds to complete a business merger or acquisition. Acquisition financing helps a company fulfill its current acquisition aspirations. Bank loans and loans from private lenders are some of the common forms of acquisition financing.
Acquisition Financing Details
The funds acquired from an acquisition financing process are specifically used to complete an acquisition deal. A company aims to expand its revenue streams, venture into newer markets and increase its market share through acquisitions. Acquisition deals are of great importance to an organization. Acquisition financing helps with the necessary capital to complete critical transactions.
Acquisition funding is done through an overdraft facility where the borrower is charged interest on the funds from the date of borrowing and not from the date of establishing the credit line. An upper limit on the amount that a company can withdraw is set up when the overdraft facility is set up. Such an overdraft facility helps the company conduct the acquisition in a staggered manner.
A company can apply for acquisition financing through traditional banks and private institutions to finance an acquisition deal. Private lenders may charge a higher rate of interest than traditional banks for the loan amount. The loan provider makes risk assessments by checking if the company to be acquired has a steady revenue stream. The loan approval process can be fast-tracked if the company to be acquired is a well-established organization with a significant market share.
Real-World Example of Acquisition Financing
A company can use its funds and complete the transaction in cash. Although, a 100% company fund-driven cash acquisition is highly risky. Facebook purchased Whatsapp in 2014 for over $22 billion, making it their largest acquisition deal ever. Facebook paid over $4.59 billion of the reported $22 billion in cash and the remaining in stock options.
Facebook used $178 million of its stock to finance the deal and paid an additional $46 million restricted stock units to existing Whatsapp employees. Whatsapp founder Jan Koum also received nearly $2 billion in stock options and became a director at Facebook.
A company can also enter into a joint venture to finance a deal and reduce acquisition costs. Sony and Ericsson entered into a joint venture to tap into the smartphone and accessories manufacturing sector. The venture was hugely successful during the early 2000s with several best-selling smartphones. In 2012, Sony acquired Ericsson's shares in the joint venture to be wholly known as Sony Corporation.
Significance of Acquisition Financing
A high-performing company can get a lot of acquisition offers from numerous companies. The competition can get quite fierce, and swift action is necessary to complete an acquisition. Acquisition financing becomes crucial for the company. Timely funds and backing the company completes the acquisition deal in a short period.
Depending on the mode of acquisition financing, a company can pay for the acquisition deal in a staggered manner. This helps them keep the interest rates of the loan amount at a minimum. The revenue streams and market share of the company can increase significantly If the acquisition goes through successfully. This reduces the burden of interest rate payments and helps the company grow through an acquisition.
Types of Acquisition Financing
Small Business Administration (SBA) loans are ideal when the company involved qualifies as a small business. The down payment and interest rates for companies using SBA loans are quite low compared to loans from private lenders and commercial banks. A company must meet the SBA's requirements like average net income, loan size, and net worth limit to qualify for a loan.
A company may turn to issuing and selling bonds as debt security in the open market. The rules and regulations imposed by a bank can be quite restrictive for companies looking to finance an acquisition. Selling bonds in the open market can be a flexible option for a company looking to finance an acquisition deal.
An accelerated bookbuild is a form of short-term offering in the equity capital market. The company makes the shares available for only a short time with little to no marketing. It is a great alternative to debt financing when a company requires urgent funds to complete a transaction. Sometimes a company can have a high debt obligation which makes acquiring funds through loans impossible.