552 20 Acquisition Finance
20.2 Funding Mix
Europe has a substantially higher share of cash-financed takeovers compared with
the US, and the share of purely equity-financed deals is much smaller in Europe
than in the US.^5 The funding mix depends on many things.
Payment and financing. The questions of the method of payment and the source
of financing are interrelated. Where the acquisition is paid for with cash, there
must be a source of cash. Where the acquisition is paid for with a promise to pay
cash in the future, some party must accept this promise. Where the acquisition is
paid for with shares issued by the acquirer, the acquirer needs less cash to acquire
the target, but there must be a party who subscribes for those shares.
Sources. Generally, the sources of acquisition finance exist at different levels of
the investment chain: investors in the target; the target; the acquisition vehicle; in-
vestors in the acquisition vehicle; their investors; and so forth.
Depending on the case, each of those parties can find that its existing invest-
ment is being used to finance the acquisition, and each of those parties can provide
new funds to finance the acquisition. Each party can invest shareholders’ capital
or act as a lender or mezzanine investor (debt mezzanine or equity mezzanine).
Furthermore, each party can also benefit from assets that belong to particular asset
investors (section 9.2), public goods provided by the state and other public bodies,
as well as particular state or similar aids (Volume I).
The result can be a very complicated financing mix. What complicates the mat-
ter even more is the question of time.
Point in time. There is typically one financing mix for the acquisition at the
time of closing and another financing mix after the acquirer has done two things:
obtained control over the target; and restructured the financial structure of the
whole firm, i.e. the financial structure of both the acquirer and the target. In a pri-
vately-negotiated transaction, the funding mix could consist of the following com-
ponents at the time of closing and after restructuring:
Table 20.3 The Acquirer’s Funding Mix for the Acquisition at the Time of Closing
Source:Level:Existing assets Shareholders Lenders Asset inves-
tors, public
bodies
Acquirer Immediately
available inter-
nal financing.New equity in-
vestment.New indebted-
ness, in particu-
lar acquisition
bridge loans.New assets,
new subsi-
dies and state
aids.(^5) Hagendorff J, Collins M, Keasey K, Investor protection and the value effects of bank
merger announcements in Europe and the US, J Banking Fin 32 (2008) pp 1333–1348.