Acquisition financing

[traineeintraining]

Hi this is going to sound really dumb but i'm doing the M&A course on here to prep for an interview and could someone clarify if equity financing involves selling shares of the target company or is the buyer selling shares of 'themselves' ?

 

[M777]

I believe equity finance is (roughly) the buyer selling shares in themselves to raise capital for an acquisition (but might be wrong- I've got an AC coming up so this helps me revise haha). I think what you mentioned (selling shares of the target company) is more to do with the structure of the acquisition itself, because you can acquire the target either through a share purchase agreement or by purchasing assets.

Might not be completely accurate, I'm no expert!

 

[Dheepa]

No such thing as a dumb question on this forum! ☺️

Equity financing generally means that a company is choosing to sell a stake/part of its shares to raise money. If I remember correctly, the M&A course on TCLA is merely referring to the ways in which the buyer can choose to raise money (debt/equity) for the acquisition, but generally you can understand the term equity financing both from the perspective of the buyer and the seller.

Buyers using equity financing for the acquisition may either be selling a direct stake in the shares to investors or could choose to do an IPO listing (which is also a sale of shares, just on a public share market). For the target company, the sale of part of their shares, or maybe all of their shares is also in a sense equity financing, because they too are raising money through that sale of shares.

The thing to remember is that equity financing isn't something companies look to do just for an M&A transaction. Companies sometimes want to raise money through a sale of shares simply because they would like to reinvest that money into the business.

I hope that makes sense let me know if you need any more clarification.

 

[CT]

Equity financing generally means that a company is choosing to sell a stake/part of its shares to raise money. I think the M&A course on TCLA is merely referring to the ways in which a company can choose to raise money (debt/equity). What they then do with that money as either a target company or a buyer in an M&A transaction (or just as a company not even looking to engage in an M&A transaction) is then entirely up to them. Also, buyers can choose to finance an acquisition using equity financing although I don't think this would typically involve selling a direct stake in the shares to investors but is more commonly done through an IPO listing.

I hope that makes sense let me know if you need any more clarification.

Hi Dheepa, could you elaborate on why the company would do an IPO listing to raise finance for the acquisition? Thank you very much!

 

[Dheepa]

Hi Dheepa, could you elaborate on why the company would do an IPO listing to raise finance for the acquisition? Thank you very much!

I've edited my initial response heavily as I think it was a bit confused and not very clear but as I've said an IPO is just one of many ways to raise capital/money through a sale of shares. What the company chooses to do with that money could range from reinvesting into the business immediately or saving that capital for down the line when they do want to acquire a company. In hindsight, I think I worded my initial answer pretty terribly because I don't actually think companies would go through the time consuming process of an IPO solely for an acquisition, but it would give them a large pool of capital for one.

 

[CT]

I've edited my initial response heavily as I think it was a bit confused and not very clear but as I've said an IPO is just a way to raise capital/money through a sale of shares. What the company chooses to do with that money could range from anything to reinvesting into the business immediately or saving that capital for down the line when they do want to acquire a company. In hindsight, I think I worded my initial answer pretty terribly because I don't actually think companies would go through the time consuming process of an IPO solely for an acquisition, but it would give them a large pool of capital for one.

Thank you, it’s more clear now

 

[traineeintraining]

I've edited my initial response heavily as I think it was a bit confused and not very clear but as I've said an IPO is just one of many ways to raise capital/money through a sale of shares. What the company chooses to do with that money could range from reinvesting into the business immediately or saving that capital for down the line when they do want to acquire a company. In hindsight, I think I worded my initial answer pretty terribly because I don't actually think companies would go through the time consuming process of an IPO solely for an acquisition, but it would give them a large pool of capital for one.

Thank You!