What Is Acquisition Financing?

M & A financing is that any enterprise needs a proper amount of funds to carry out production and operation activities, and the process of obtaining these funds through various channels and corresponding means is called financing. Financing is one of the important capabilities of any company. The company's funding sources, investment direction, investment income, and distribution methods to shareholders give the company vitality. Managers' insight gives the company long-term development plans, but only cash can give the company life.

M & A financing

M & A financing is what any business wants to do

The connotation of M & A is very broad, generally refers to

M & A

M & A is essentially an investment activity for the acquirer (acquirer). The premise of an enterprise's investment activities is to finance the required funds. In financing arrangements, we must not only ensure the total demand, but also fully consider the cost of financing and the risks of financing.

M & A financing as

M & A financing status

(I) Status

With the continuous deepening of corporate reforms, merger and acquisition activities between state-owned enterprises, between state-owned and non-state-owned enterprises, between listed and non-listed companies, and between domestic and foreign-funded enterprises have flourished. Increasingly active M & A activities have put forward higher requirements for the improvement and improvement of financing mechanisms. In order to better promote the pace of reform of state-owned enterprises and carry out extensive mergers and acquisitions, enterprises are actively exploring external financing channels while deepening their internal potential and vigorously raising their own funds. With the rapid development of the modern capital market, especially the securities market, more and more merger and acquisition activities are carried out through the securities market, property rights trading market, etc., and the financing function and resource allocation function of the capital market are increasingly reflected.

Most of the acquisition methods are agreement acquisitions, and direct cash payment is the main method of acquisition. Share swaps and mergers are rarely used. The main funds for China's mergers and acquisitions come from the accumulation of internal shares, initial public offerings (IPOs) and additional rights issues. Due to China's more restrictions on external financing, external financing has not been well developed, and many companies are on the brink of policy when financing. In the transaction announcement, the specific financing arrangements of the enterprise were not fully disclosed.

With the adjustment of China's industrial structure and the intensification of corporate competition, the scale of mergers and acquisitions will increase, and the frequency will increase. The company's own funds will be difficult to meet the requirements. Expansion of external financing has become an important issue for enterprises. With the emergence of management board (MBO) in China, financing channels have become a bottleneck restricting the transformation of corporate governance structure and expansion of scale.

From the perspective of the method of financing in China, there is not much difference from foreign countries. The financing methods available to companies are relatively complete, but specific to M & A, the available financing methods are very limited, mainly because the existing laws and regulations in China are for avoiding risks. Taking into consideration, there are strict and specific regulations on the application of various financing methods. From the perspective of equity financing and debt, there are mainly situations such as issuing stocks, financing through equity agreements, issuing bonds (including the issuance of convertible bonds), loans, and free transfers.

Free transfer is a phenomenon peculiar to China's state-owned economy. It refers to the government's exercise of ownership of state-owned assets on behalf of the state, and the transfer of property rights of target companies to the acquirer through administrative means. The advantages of this method are low transaction costs and resistance. Small, fast, and strong integration of property rights, acquirers often enjoy various preferential policies given by the local government. The disadvantage is that administrative actions that are contrary to the wishes of the enterprise are prone to make the acquirer carry a heavy burden. Due to the free transfer of mergers and acquisitions in violation of market rules, it is difficult to achieve the strategic development goals of enterprises, and due to the forced mergers between enterprises, there are a series of problems in the integration process after mergers and acquisitions. The acquirer will often be overwhelmed by the debt or poor operating conditions of the acquirer, failing to achieve the real purpose of the merger. Lanling Group's acquisition of Huanyu shares, FAW Group's acquisition of Yunnan Blue Arrow, and Tianjin Teda's acquisition of Meilun's shares were all conducted through free transfer. ^[1]

(2) Existing problems

1. Narrow and single financing channels

The internal financing of enterprises for mergers and acquisitions, under the current situation of generally poor corporate efficiency, the amount of financing is very limited; the three main aspects of external financing, namely bank loans, the issue of stocks and the issuance of corporate bonds, also have varying degrees of restrictions .

2. The listed company's equity structure is unreasonable, the number of shares in circulation is small, and the proportion is small, which artificially increases the financing demand for mergers and acquisitions, which hinders the smooth progress of mergers and acquisitions.

With the further improvement of the equity structure of listed companies in China, the asset restructuring of listed companies will increasingly adopt acquisition methods. However, due to the particularity of China's listed companies' equity, and the proportion of tradable shares is low, this method often costs the purchaser several times higher than the non-tradable shares transfer method. The increase in M & A costs will undoubtedly lead to an increase in the amount of financing, which in turn increases the risk of financing and its success rate.

3. Lack of financing tools.

Chinese enterprises mainly rely on bank loans and stocks to raise funds during mergers and acquisitions. The financing instruments are relatively monotonous. Coupled with the existing shortcomings of the capital market itself, it becomes more difficult to finance the mergers and acquisitions.

4. M & A financing has not really achieved marketization.

Many M & A activities are planned and arranged by the government in the first hand, and are not voluntary. Therefore, the problems encountered in M & A financing must be solved by the government, which will also affect the financing needs of other enterprises.

5. For corporate mergers and acquisitions through market means, we must consider not only the capital situation before the merger, but also the capital re-financing after the merger.

M & A funds are paid to the owner of the target company and do not enter the target company. The injection of funds after the merger and the repayment of borrowings for the financing of the merger and acquisition play a vital role in the operation of the company and are the key to the success of the merger and acquisition activities. The current corporate mergers and acquisitions just focus on the capital requirements at the time of mergers and acquisitions, and lack of preparation for the re-injection of funds after mergers and acquisitions. This will not only cause the merger and acquisition activities to be abandoned halfway, but also waste the funds invested in advance.

6. Main channels for external financing-There are many problems in the B-share market, mainly including:

(1) The market size is small. Although the scale of China's B-share market has been expanding year by year, the expansion rate has been relatively slow, resulting in a small market size. On the one hand, it weakens the investment interest of large international institutional investors, and on the other hand, it makes the ability to withstand the impact of international hot money more vulnerable.

(2) Poor market liquidity. Compared to the A-share market, the B-share market has a light trading and a low stock turnover rate. In order to digest a certain amount of sell orders, it is necessary to wait a considerable time to accumulate enough buying orders to complete the transaction. Therefore, in a small-scale market, when the seller is dominant, the overall market price will not be bullish. The low liquidity of the B-share market leads to fewer people entering the market, large funds cannot be scheduled, and it is difficult to enter and exit, which has caused the market to fall into a vicious cycle of poor liquidity-reduced capital and number of people entering the market-worse liquidity .

(3) There are few listed companies with good performance and high quality. Among the existing B-share listed companies, except for a few companies with outstanding performance, a considerable number of listed companies are not operating satisfactorily, and their return on net assets is low. In connection with this, there is still a lack of information disclosure for B-share listed companies, which is still far from the requirements of investors. These existing problems obviously prevent domestic companies from financing overseas through the domestic market.

M & A financing channels

In order to effectively carry out corporate mergers and acquisitions, more financing channels must be opened up, newer financing tools must be used, and reasonable financing mechanisms must be established.

(1) Seeking innovation in equity financing

As mentioned earlier, in order to give full play to the role of equity financing in mergers and acquisitions, there are many obstacles to existing equity financing methods, which must be innovative.

1. New ways of equity financing.

(1) Targeted placement. Targeted placements are more common in Western and Hong Kong capital markets. The biggest advantage of issuing company stocks to buy their assets to specific investors is that joint-stock companies do not need to pay a lot of cash, which makes mergers and acquisitions easy to complete. China's capital market is in its infancy. Prior to this, apart from primary issuance and rights issue, this concept and practice were rarely used. Some listed companies have issued stocks to specific investors, setting a precedent for targeted placements in China's capital market, and found a new way for corporate M & A financing.

(2) Issuance of new shares. In the practice of capital financing in China, there are two specific forms of public issuance of new shares by enterprises, one is the initial issue and the other is the rights issue. The additional issue of new shares mentioned here is aimed at the public. It is neither a rights issue nor an initial issue, so it has become the third public issue method other than the initial issue and rights issue. Additional issue of new shares. On the issue object, the issuance of new shares breaks through the single approach of placing shares with old shareholders. According to the general rules of the joint stock company, the shares are transferred or the new shares are issued. Except for approval by the shareholders' general meeting, the old shareholders generally have the priority to assign or subscribe. . A rights issue is a typical embodiment of this principle. Under the conditions of a rights issue, shareholders' choices are either to purchase unconditionally or to give up. With the new issue of shares, old shareholders can have priority to purchase, and at the same time, part of the public offering is also a more practical approach considering the affordability of old shareholders. But no matter what, the issuance of new shares in addition to the initial issuance and rights issue will undoubtedly inject new components into the M & A financing market, and will continue to advance corporate mergers and acquisitions. ^[2]

2. Standardize the development of securities OTC markets.

In order to better realize the innovation of equity financing methods, we should vigorously cultivate securities secondary market transactions. At present, we must take effective measures to regulate the development of securities OTC markets. This is an important condition for enterprises to raise funds through capital markets. Through over-the-counter trading (over-the-counter trading), securities brokers or securities dealers directly trade unlisted securities, sometimes including a small portion of listed securities, with customers without going through a stock exchange. Over-the-counter and over-the-counter trading, as two different forms of trading in the securities market, can meet different transaction needs and provide financing for mergers and acquisitions.

(2) Expansion of bond financing ratio

At present, the scale of China's corporate bonds is too small, lagging far behind stocks and treasury bonds. Compared with the rise of debt financing and the decline of equity financing in the world, it forms a strong contrast. Since the 1980s, international debt financing has become a major means of financing for enterprises in developed countries, and its proportion in the international financing market is constantly expanding. The size of the U.S. bond market is about five times the size of the stock market. In particular, companies with good performance are worried about giving up equity to others and are more concerned about bond financing. In order to adapt to the development of China's economy in the future, while actively developing the stock market, we should pay more attention to the bond market and walk on "two legs" to allow corporate bonds to develop normally and become a major channel for direct financing of enterprises. Development of bond financing

(3) Make full use of new derivative financial instruments such as convertible bonds and warrants to reduce M & A financing costs

Convertible bonds provide holders with an option to convert bonds into stocks at a specific price within a certain period of time. As a new type of M & A financing instrument, convertible bonds have the biggest advantage for the acquirer in that it can be issued at a lower interest rate and more favorable contract conditions than ordinary bonds, thereby greatly reducing the financing cost of M & A. At the same time, when the company goes through the M & A period and enters development, bondholders exercise conversion rights, which can avoid the situation of excessive debt of the company after the completion of the acquisition and reduce the financial risk of the company after the acquisition. In the early stages of the completion of a large number of company mergers and acquisitions, it is undoubtedly a better financing tool due to the huge pressure on debt and interest payments. Warrants can also enable companies to raise a large amount of funds at low or even zero costs in the process of mergers and acquisitions, but they have not been widely used in China's mergers and acquisitions. Therefore, in the merger and acquisition financing of Chinese enterprises, foreign experience should be borrowed, while developing the capital market, make full use of new derivative financial securities such as convertible bonds and warrants as an effective merger and acquisition financing tool.

(IV) Pilot commercial paper financing

Aiming at the short-term huge capital gap that restricts the smooth progress of corporate mergers and acquisitions, the issue of commercial paper is an effective solution. In foreign countries, bill issuance financing is a medium-term revolving commercial paper financing. It is a financing method for large enterprises with good reputation to use commercial paper to raise short-term funds in the financial market. Because commercial paper is an unsecured note, only large companies with large capital, good operating efficiency, and small financial risks can issue commercial paper for financing. The issue target is mainly professional investors and financial institutions.

The characteristics of bill issuance financing are mainly reflected in lower financing costs, sufficient flexibility, a wide range of funding sources, and the borrower's choices.

The merger and reorganization of Chinese enterprises requires a large amount of capital support, and this huge capital demand also provides development space for bill financing. Compared with several other financing methods commonly used by Chinese enterprises at present, bill issuance financing is greater than corporate bond financing Flexibility, can take different financing strategies and contingency measures at any time according to changes in the market, capital supply and demand. At the same time, commercial paper financing can avoid the increase of the opportunity cost of enterprises brought by other equity financing methods. Therefore, the financing of bill issuance should become a realistic choice for the financing of corporate mergers and acquisitions in China.

(V) M & A loans issued by commercial banks

In broadening the financing channels for corporate mergers and acquisitions, commercial banks should be encouraged to issue special loans for mergers and acquisitions directly to enterprises, and implement closed management and special account use. The state provides preferential policies in terms of interest rates and repayment terms to the banks that provide loans, provided the loan companies can afford it. Commercial banks directly providing M & A loans to enterprises will effectively promote the smooth progress of corporate mergers and acquisitions and improve the performance of mergers and acquisitions.

(6) Financing from foreign securities markets

In addition to actively seeking domestic financial support for corporate mergers and acquisitions, China should also vigorously broaden overseas financing channels. In the international capital market, financing methods show a trend of securitization, that is, a large number of financing instruments are in the form of securities, which has changed greatly from loans in the past. This development trend of the international capital market has brought good opportunities for Chinese companies to conduct M & A financing internationally.

(VII) Financing by asset securitization

Asset securitization is an innovation in financing methods. Although it is very mature and has been popularized to some extent in developed countries, it is still a new thing for China. The essence of asset securitization is the replacement of the company's existing assets with monetary funds. Investors mainly rely on the quality of the asset portfolio and the reliability and stability of future cash income flows. Relatively secondary status. Through asset securitization, it can not only achieve the purpose of corporate mergers and acquisitions financing, but also improve the quality of existing assets, accelerate asset turnover and capital circulation, and increase the rate of return on assets and capital utilization. Therefore, asset securitization can be used as a new financing tool in China's corporate M & A activities.

(8) Relax the legal and regulatory restrictions on corporate mergers and acquisitions, and provide legal sources of funds for corporate mergers and acquisitions

The acquirer of a listed company often needs to raise a large amount of funds, especially when the acquisition is made in cash. At this time, it is often necessary to help finance the capital market. Looking at the M & A cases of developed countries in the capital market, almost all of them are accompanied by huge additional sources of financing. However, at present, China has set up many obstacles to the financing of mergers and acquisitions. As a result, it has hindered the normal mergers and acquisitions. At the same time, many enterprises have to conduct illegal operations for mergers and acquisitions financing. At the same time, it seriously disrupted the order of the capital market. Therefore, the current wise move should make appropriate amendments to existing regulations as soon as possible to legalize the funding channels necessary for normal M & A.