550 20 Acquisition Finance
Third, funding can be raised by one or more of those legal entities. It is usual to
employ a legal entity acting as a takeover vehicle. In a leveraged transaction, this
entity will be highly leveraged.^2
Fourth, the acquirer will have to coordinate the acquisition transaction and the
funding transaction. One transaction influences the other.
Fifth, the questions of funding and exit are interrelated. The legal aspects of
exit have been discussed in Chapters 8–10.
Form. The form of takeover finance can depend on many things. It can depend
on time. The acquirer will need funding in the short term and in the long term.
Short-term bridge financing will be replaced with longer-term financing after the
completion of the acquisition.
It can depend on the consideration for the shares or assets bought. The acquirer
may need to raise new external funding from investors if it makes a cash offer, but
needs less funding from external investors if it pays by issuing its own shares to
the seller (share offer).
Consideration for the shares or assets bought can depend on the vendor, be-
cause the main rule (from which there are exceptions especially in company law)
is that the seller does not have any obligation to sell.
The form of takeover finance can depend on the structure of the acquisition.
Typically, the assets or shares can be bought by the ultimate acquirer (A) directly
or indirectly. In the latter case, another legal entity (B) is used as an acquisition
vehicle. As the acquisition vehicle buys the assets or shares, it must raise funding.
Part of it will come from the ultimate acquirer and other investors in the form of
equity. The rest may be provided by lenders. If the acquisition vehicle buys shares
in the target company (C), the two companies can merge, in effect leaving the tar-
get loaded with debt (B + C).
It can depend on the acquirer. A listed company may be able to raise funding
from the stock market. A privately-owned company may have to raise funds
through other means. In the case of a management buy-out, the managers them-
selves may need to borrow to finance their own purchase of shares in the takeover
vehicle.
The form of funding can also depend on the size of the transaction. (a) A small-
scale acquisition might simply be financed by bank borrowings. (b) If more sub-
stantial amounts of money are needed, the buyer might have to raise funds through
other means. The buyer may issue shares and choose a mixture of debt and share-
holders’ finance. The shares may be ordinary shares or preference shares. The
buyer may sometimes turn to a venture capital fund. (c) In a very large acquisition,
venture capital funds may be joined by a syndicate of banks. Typically, the banks
will provide the senior debt which will be secured and be honoured first if there
are problems, and there will be some form of mezzanine finance.
And finally, it can depend on the source of funding. The most usual sources of
funding are: the acquirer’s existing assets; the acquirer’s shareholders; the ac-
(^2) See, for example, Diem A, Akquisitionsfinanzierungen. C.H. Beck, München (2005) § 1
numbers 10–11.