Introduction

Mergers and acquisitions nowadays take up a significant part of the corporate world with them working as the regular cycle of a business. Each company would want to expand its outreach by investing in various opportunities which in future guarantees them as a possibility of securing a position or by gaining popularity in the world. This process has gained significant importance in the present day with every company striving for success and maximized profit in the business market. The benefit is of such a merger, or acquisition is that it can immensely help a business expand, gather knowledge, move into a new market segment. Expansion can be of various ways by increasing the workforce, selling various products and also by extending their line but synergetic investments tend to be much more appealing to the investors as they tend to offer much more opportunities for both the investors and also the company that plans on extending their business.

What is acquisition financing?

As has been previously mentioned, for a company to acquire, financing is the critical factor. Primarily for a standard merger deal, it typically involves administrators, lawyers and investment bankers. These three entities make up for the framework of mergers and acquisition within. Acquisition financing is the capital that is obtained to buy another business. Such financing allows the company that is a smaller company to expand their business, size of its operation and the benefit that can be attained through such financing. The most familiar institutions that are often resorted to are banks, lines of credit and also sometimes through which a  company gets access to the finances may be different. However, the most common form of acquisition financing is the one done through a line of credit or a traditional loan. Such a traditional loan includes the banks or institutions that specializes in such a field. Private lenders may also be one of such a source, but often it can be found that such a source may charge vast amounts of interest.

The situation of acquisition financing in India is instead evolving. Over the last two decades, much gas changed with India transforming from being a country which focussed only on its internal economy to a globalized market, based economy, which now is considered to be one of the most attractive destinations for investments.

Types of Acquisition Finance

There are various kinds of acquisition financing options, but the buyer would often search for a one that would be a cost-effective route to create a capital structure that mainly benefits the buyer.

Following are some of the standard acquisition financing:

• Bank financing– This type of financing is one of the most affordable forms of acquisition financing yet not the easiest to acquire, especially when it has short term assets. Bank financing is available through operating to and which can be secured and obtained through accounts and inventories.
• Equity investments– Acquisition financing or funding through equity investment provides for the capital through investments by allowing the investors to become partners in the business with the decision-making rights, where the future profits would, therefore, provide for or repay the investors. Such an investment often ensures that the company is left with no debt and is one of the most suited for companies operating with tangible assets. 
• Seller financing– This sort of funding is a highly profitable one. Under such financing, the seller financing allows the seller to support the buyer by funding for the acquisitions in the form of loans and by becoming investors in such a business. Such a method of financing helps the medium of small business who does not have access to funds but who does want to retain some control over such a business.
•  Asset-based financing– Under such financing, the buyer gets the required funds through the assets that he possesses. Such assets involve inventory, accounts receivable, equipment and other fixed assets.
• Debt security– Under such financing, the company may use debt security such as issuing bonds, in order to finance the acquisitions. When such acquisition is made, it can often be at times found that the companies are selling bonds on the open markets, thus gaining certain advantages. Under such debt financing, collateral may include assets, receivables, intellectual property and inventory.
• Stock swap transactions– Under certain times, the company may exchange its stock with the target company. Such a form of transaction is common in private companies, whereby the owner of the target company would want to retain a portion of the company and hence they remain actively involved in the operation of the business.

Conclusion

The financing for any acquisition can be done in various forms, but the critical point or understanding is that how much so will be applicable for the buyer or the company that plans on buying. The need for the company is to be cost-effective and optimal so that it aligns with what the company aims to achieve.

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Introduction

After the advent of the globalisation, the domestic, as well as the global market, saw an increase in the number of acquisitions predominantly by the private equity firms. Leveraged acquisitions or commonly known as the leveraged buyout has become the favoured vehicle for the business acquisitions by the private equity firms, management buyout groups, etc. Investors or the private equity firms over the years have resorted to the means of the buyout because of the new innovation or technique through which they can invest on a large corporation or a company even though they might not have a vast amount of equity for such an acquisition. The basic strategy behind such an investment is to acquire the target company and its target management through a minimum equity share.

Understanding what a leveraged buyout is

A leveraged buyout is essentially a strategical process through which a company is acquired by a specialised investment firm through the process of using a small portion of debt financing. Under a leveraged acquisition, the leveraged buyout firms or what they are most commonly referred to as nowadays buys a majority or invests considerably thereby gaining majority control over the mature firm with a minimum share of the equity. The private equity firm then uses the cash inflow from the acquired firm to pay off the debt. This can be taken as a distinguishing feature from the venture firm, which mainly gains control over only a minimal amount of the firm which is young or individual emerging companies. The concept of the leveraged buyout became increasingly common in the year 1980 and also substantially increased in size. Jensen had predicted that the leveraged buyout organisation would eventually become the dominant corporate organisational form because of its high powered incentives for the private equity professionals with minimal overhead costs. Under such a buyout there is the existence of a ration of 70% debt and 30% equity. The assets of the company after having acquired are then used as collateral for the loans in addition to the assets that the acquiring company would also possess. The very purpose of a leveraged company is to allow companies to make significant acquisitions without having to commit much capital. A good example of it would be when anyone invests in a house after having taken loans. This house after having been bought is then given under rent; hence the amount which is received as rent is now used for the repayment of the loan.

Types of leveraged buyouts or acquisitions

• Management buyouts: According to the Hindu Business line, a management buyout or refers to the acquisition of the divested or a subsidiary company or of a privately owned firm in which the existing company also takes up a substantial portion of the firm or of the equity. Under such a situation, the owner may desire to sell the firm, but the management may think or envision for future growth potential and therefore are ready to take or acquire a considerable share of it. It is often found that the managers of the company may not possess the required capital for such an acquisition they are often compelled to seeking financial or even a strategic partnership for this purpose. In such a case, therefore it is found that the MBO is much more helpful than the LBO.
• Management buy-ins: A management buy-in is simply an MBO with the only difference being that the management teams are outsiders. Although similar to the MBOs, MBIs carry a higher risk as the incoming management are not much aware to the knowledge or the various details of the operation of the business similarly, they might also not know about the inner working of the company that is to be acquired. The advantage of such an MBI is that it has a broader chance for the others who possess a better knowledge than the existing management team. Similarly, such a team may provide for the company and also have a good reputation.
• Institutional buyouts– Institutional or the investor-led buyouts refer to the acquisition of a whole company or a division of a large group. The private equity firm may retain the existing management to run the company or even may hire a new team for its management. Such management may also run as a cumulative effort of both the internal as well as the external management.

Advantages and Disadvantages of the leveraged buyouts

Advantages

• This sort of buyout helps in getting rid of any areas or services for the product duplication. It can also reduce the operational expenses, which in turn can lead to an increase in profits.
•  This sort of buyout helps in increasing the buyouts as it helps in reducing the competition.
• A private equity firm would want to buy a smaller company with the objective in developing new technologies which may be beneficial for both of them.

Disadvantages

The most significant disadvantage of such a buyout is the increase in debts. A leveraged buyout is only successful if the debt is paid timely. Increase in the number of debt results in affecting the debt structure of the acquirer and may lead to an increase in the loan finally being bankrupt.

Conclusion

A leveraged buyout is, therefore, a very beneficial way of accessing the market, thus reducing the competition. It is the new vehicle as has earlier been mentioned, which has resulted in the investors in gaining control over mature firms with a minimum equity share. However, this buyout comes with a risk that is of an increase in debt. Hence it is essential for any investor to understand the risks before venturing into it thoroughly.

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