Most Important Financing Decisions in Corporate Takeovers

In business, a takeover is the purchase of one company the target by another (the acquirer, or bidder. The term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company. In a general sense, mergers and takeovers or acquisitions are very similar corporate actions. They combine two previously separate firms into a single legal entity.

A corporate takeover happens with a takeover bid. In which an acquiring company makes an offer to the target company’s shareholders to buy the target company’s shares in order to gain control of the business.

When it comes to the most important financing decisions in corporate takeovers there are three factors to look at.

Knowing what the other business is worth.

So to reap the rewards that come from your combined strengths. A smart business merger can help you enter a new market, reach more customers, freeze out a competitor or fill a gap in your company’s abilities. Mergers can get you on the fast track to become more competitive. With a complementary partner, your business can acquire products, distribution channels, technical knowledge, infrastructure or cash to propel you to a new level of success.

The means of payment

Whether it will be a cash offer that’s entirely financed with money or if it will be external sources of funds like debt and equity, As these are frequently used to finance all-cash offers.

The sources of financing

How companies choose the financing sources for their investment projects. This is also a way to test whether the bidder’s financing decision is driven by the following explanations:

Pecking order and market timing
Regulatory environment
Debt overhang
Takeover threat
The agency costs of equity and debt

As the choice of the funding may depend on the means of payment offered in the takeover. The bidder’s preferences for a financing decision for a specific payment method reveals that the payment decision depends on the degree to which the bidder’s large shareholders wish to retain control after the takeover. And also on the intention of the bidder’s shareholders to share the risk of the transaction with the target’s shareholders or to buy all the shareholders out.