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Commercial Awareness Discussion Thread

Dwight

Legendary Member
Dec 21, 2019
260
90
Hello @Dwight. I have a question regarding Equity financing in M&A transactions. From what I've understood, equity financing means two things. First is, selling shares of your company for money and then use that money to acquire another company, with the money that you just earned by selling your shares. Secondy, equity financing means that instead of selling your shares for money and using that money to acquire the other company, you directly give the shares worth the relevant amount to the shareholders of the target company.
This was the financing part.

Now, the payment part depends on what the shareholders of the target company would like. If they want cash, then they will get paid in cash but if they think that the shares of the acquirer will grow in value in future, they would prefer shares over cash. Have I interpreted "equity financing" in M&A correctly or is there something wrong here?
Thanks for posting this on the public forum, @futuretraineesolicitor. This way, everyone can benefit.

That sounds about right. One thing I would add here is: when a company decides to use equity financing to acquire a target company, it issues news shares. Therefore, a special resolution, a 75% vote of that class of members (just another word for a shareholder), is required. This is pursuant to The Company Act 2006.

Furthermore, this may be a long shot, but consider the duties of directors. The directors of a company have, for example, the duty to promote the success of the company. Is the issuance of new shares in the circumstances sufficient?

I am no expert, but I would say to always think of the legal angle in your analysis. Ultimately, we are all applying to LAW firms.

Also, another way to raise capital (for M&A activity) is an initial public offering (IPO). If you don’t already know about this, you can read more about it here: https://www.investopedia.com/terms/i/ipo.asp. Apologies if I have insulted your intelligence here; I am just trying to give the most comprehensive overview possible.

Finally, a great site that explores equity and debt financing: https://www.fe.training/free-resources/ma/ma-financing/.

Hope this helps! @Jaysen @Jacob Miller @Dheepa @Neville Birdi - you are all more experienced than me, so perhaps you can add more/correct me.
 

futuretraineesolicitor

Legendary Member
Dec 14, 2019
405
87
Thanks for posting this on the public forum, @futuretraineesolicitor. This way, everyone can benefit.

That sounds about right. One thing I would add here is: when a company decides to use equity financing to acquire a target company, it issues news shares. Therefore, a special resolution, a 75% vote of that class of members (just another word for a shareholder), is required. This is pursuant to The Company Act 2006.

Furthermore, this may be a long shot, but consider the duties of directors. The directors of a company have, for example, the duty to promote the success of the company. Is the issuance of new shares in the circumstances sufficient?

I am no expert, but I would say to always think of the legal angle in your analysis. Ultimately, we are all applying to LAW firms.

Also, another way to raise capital (for M&A activity) is an initial public offering (IPO). If you don’t already know about this, you can read more about it here: https://www.investopedia.com/terms/i/ipo.asp. Apologies if I have insulted your intelligence here; I am just trying to give the most comprehensive overview possible.

Finally, a great site that explores equity and debt financing: https://www.fe.training/free-resources/ma/ma-financing/.

Hope this helps! @Jaysen @Jacob Miller @Dheepa @Neville Birdi - you are all more experienced than me, so perhaps you can add more/correct me.
Thank you so much for this answer.
 
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Dheepa

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Forum Team
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  • Jan 20, 2019
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    Hello @Dwight. I have a question regarding Equity financing in M&A transactions. From what I've understood, equity financing means two things. First is, selling shares of your company for money and then use that money to acquire another company, with the money that you just earned by selling your shares. Secondy, equity financing means that instead of selling your shares for money and using that money to acquire the other company, you directly give the shares worth the relevant amount to the shareholders of the target company.
    This was the financing part.

    Now, the payment part depends on what the shareholders of the target company would like. If they want cash, then they will get paid in cash but if they think that the shares of the acquirer will grow in value in future, they would prefer shares over cash. Have I interpreted "equity financing" in M&A correctly or is there something wrong here?

    Nope you’re understanding of this is spot on. I’d just caution against mentioning the companies act or directors duties etc at interview as I think the focus should always be on the commercial side of things first