M&A financing is a financing activity carried out by an enterprise for a specific purpose, and the specific direct purpose is to let the acquirer merge or acquire the acquired enterprise. So how much do you know about financing in M&A?

I. Main financing methods of China M&A

M&A financing refers to the financing activities carried out by M&A enterprises for M&A target enterprises. According to the sources of financing, the financing methods of M&A in China can be divided into endogenous financing and exogenous financing. There are significant differences between the two financing methods in financing cost and financing risk. This directly affects the choice of financing methods in enterprise M&A activities.

internal capital

Endogenous financing refers to the funds obtained and accumulated by enterprises through their own production and operation activities. Endogenous financing mainly refers to depreciation fund, amortization of intangible assets and retained earnings of enterprises. Endogenous financing is what an enterprise obtains in its production and operation activities and stays in the enterprise for use? Free? Capital, capital cost is low, but the internal supply of funds is limited, it is difficult to meet the large amount of funds needed for mergers and acquisitions.

External financing

Exogenous financing means that an enterprise raises the required funds from outside the enterprise in some way. According to the nature of funds, external financing can be divided into debt financing and equity financing.

1. Debt financing

Debt financing means that an enterprise obtains the required funds by borrowing from abroad. Debt financing includes commercial bank loans and the issuance of corporate bonds and convertible corporate bonds. Compared with equity financing, debt financing will not dilute equity and threaten the control right of controlling shareholders. Debt financing also has the advantages of financial leverage, but it has the rigid constraint of repaying principal and interest, and the financial risk is high. Poor risk control will directly affect the survival of enterprises. Among the debt financing methods, commercial bank loans are the main way to obtain funds when Chinese enterprises merge, which is mainly due to the underdeveloped financial market, poor other financing channels or high financing costs. In addition, M&A activities are often carried out by the government. A tour guide? Under the market behavior, it is easier to obtain loans from state-owned commercial banks to solve the property rights problems of state-owned enterprises.

2. Equity financing

Equity financing refers to the funds obtained by enterprises through absorbing direct investment and issuing common shares and preferred shares. Equity financing has long-term use of funds, and there is no pressure to repay the principal and interest. However, equity financing often dilutes equity, threatens the control right of controlling shareholders, and pays investors' profits with after-tax income, so the financing cost is high.

Second, the factors that affect the choice of M&A financing methods for China enterprises

The financing mode of enterprise M&A has a direct impact on the success of M&A. The choice of financing methods needs comprehensive consideration, mainly including the following factors:

(A) the level of financing costs

The acquisition and use of funds have costs, even if they are owned, the use of funds is by no means? Free lunch? . The cost of M&A financing will affect the acquisition and use of M&A financing. The enterprise's M&A activities should choose the source of funds with low financing cost, otherwise, the purpose of M&A activities will violate the fundamental goal of M&A and damage the enterprise value. Western pecking order theory considers the financing order from the perspective of financing cost. This theory holds that enterprise financing should be endogenous financing first, and then exogenous financing. External financing should give priority to debt financing, and equity financing can be considered when it is insufficient. Therefore, when choosing the financing mode of enterprise M&A, we should first choose the endogenous capital with low capital cost, and then choose the exogenous capital with high capital cost. When choosing foreign capital, we should give priority to debt capital with financial leverage effect, and then choose equity capital.

(B) the size of the financing risk

Financing risk is a factor that cannot be ignored in the process of enterprise merger and acquisition financing. M&A financing risk can be divided into pre-M&A financing risk and post-M&A financing risk. The former refers to whether the enterprise can raise enough funds before the start of M&A activities to ensure the smooth progress of M&A; The latter means that after M&A, corporate debt financing faces the pressure of repaying principal and interest. The more debt financing, the higher the corporate debt ratio and the greater the financial risk. At the same time, whether the return on investment can make up for the financing cost after the merger, if the return on investment is less than the financing cost after the merger, the merger will only damage the enterprise value. Therefore, China enterprises must consider the financing risk when planning M&A activities. China has relevant laws and regulations on enterprise equity financing and debt financing. For example, the state stipulates that bank credit funds mainly supplement the shortage of working capital and fixed capital of enterprises, and there are no credit projects for mergers and acquisitions. Therefore, enterprises must first face laws and regulations in order to obtain M&A credit funds from commercial banks. China also has stricter financing requirements for issuing stocks. The Securities Law and the Company Law have formulated strict regulations on initial stock issue, rights issue and additional issuance. Listing qualification? Relatively scarce, not all companies can meet the conditions and can issue shares to raise funds to complete mergers and acquisitions.

(C) the impact of financing methods on the capital structure of enterprises

Capital structure is the proportional relationship between long-term debt and owner's equity from various sources of funds. M&A financing will affect the capital structure of enterprises, and M&A financing will affect the corporate governance structure through the capital structure. Therefore, M&A enterprises can achieve a better capital structure through certain financing methods, realize the rational allocation of equity and creditor's rights, optimize the corporate governance structure, reduce the principal-agent cost, and ensure that enterprises can realize value appreciation after the completion of M&A activities. Therefore, M&A must consider the influence of financing methods on the capital structure of enterprises, and choose appropriate financing methods according to the strength and equity preference of enterprises.

(D) the length of financing time

The length of financing time will also affect the success or failure of mergers and acquisitions. Faced with favorable M&A opportunities, enterprises can obtain M&A funds in time, which is easy, convenient and fast to ensure the success of M&A; On the other hand, a long financing time will make M&A enterprises lose the best M&A opportunity and have to give up M&A. In China, it usually takes a short time to obtain credit from commercial banks, while the financing of issuing stocks faces strict qualification examination and listing approval procedures, which takes a long time. Therefore, China enterprises should consider the financing time when choosing financing methods.

Third, the innovation of M&A financing mode of China enterprises

With the development of socialist market economy and the deepening of opening to the outside world, M&A's activities in China are in full swing. China's M&A activities are not only carried out in China, but also many large domestic enterprises actively participate in international M&A, and the amount of M&A funds has increased geometrically. However, the existing M&A financing methods of China enterprises are relatively backward, and it is difficult to meet the demand for huge funds for domestic or international M&A activities. It is imperative to learn from the innovation of M&A financing methods of foreign enterprises.

Leveraged buyout financing

Leveraged acquisition (LBO) means that M&A enterprises use the assets of the target company as collateral to acquire the target company, and then repay the principal and interest with the future earnings of the target company or by selling some assets of the target company after the acquisition is successful. Leveraged buyout financing is different from other debt financing methods. Leveraged buyout financing mainly relies on the operating income generated by the target enterprise after the merger or the sale of some assets to repay the liabilities, while other debt financing mainly relies on the acquired enterprise's own funds or other assets to repay. Under normal circumstances, the self-owned funds used by M&A enterprises for M&A activities only account for about 65,438+05% of the total M&A price, and most of the remaining funds are solved through bank loans and bond issuance. Therefore, leveraged buyouts are characterized by high leverage and high risk. Can leveraged buyout financing help enterprises that lack a lot of M&A funds? Win-win? Promote enterprises to complete mergers and acquisitions.

(2) Trust financing

Trust financing M&A means that trust institutions help investors to buy trust property that can generate cash flow for M&A enterprises, and M&A enterprises use trust funds to complete the acquisition of target companies. Trust financing has the characteristics of strong financing ability and low financing cost. According to the Administrative Measures for Trust and Investment Companies issued by the People's Bank of China in 2002, the total balance of trust funds raised by trust companies can reach 3 billion yuan, which can well solve the large demand of financing subjects for funds. Due to the credit service provided by trust institutions, the initial financing cost of financing enterprises is reduced, and trust financing reduces the capital cost of financing enterprises, which is beneficial for M&A enterprises to complete the acquisition of target companies.

(3) Securities trading and M&A financing

Converting shares into M&A means that M&A enterprises exchange shares of the target company for shares of M&A enterprises according to a certain proportion, and the target company terminates or becomes a subsidiary of M&A company. Stock-for-stock mergers and acquisitions are usually divided into three situations: capital increase and stock exchange, stock exchange and cross-shareholding of parent and subsidiary companies. For M&A enterprises, share swap financing does not need to pay a large amount of cash, will not occupy the company's working capital, and the cost is lower than cash M&A payment. Mergers and acquisitions of stock exchanges have played an important role in promoting mergers and acquisitions of listed companies in China.

(4) Warrant financing

Warrant is a derivative financial product, which is issued by listed companies. It can give the holder the right to buy a certain number of new shares at a predetermined price within the validity period (usually 3- 10 years). Usually, when a listed company issues warrants, it will issue them together with stocks and bonds. By giving some compensation to the original shareholders of tradable shares and improving the attractiveness of financing tools such as stocks and bonds to investors, it is helpful for listed companies to successfully achieve financing purposes. Therefore, issuing warrants can successfully achieve the purpose of financing for M&A enterprises that need a lot of financing.

China capital market tried to apply warrants on 1992. For example, Le Fei and Bao 'an issued rights issue warrants. However, due to the unreasonable ownership structure of listed companies in China, one share is dominant, individual institutions manipulate the market and market speculation is serious, so they have to stop warrant trading. However, with the implementation of various laws, regulations and regulatory policies in China's capital market, the conditions for launching warrants in China are gradually mature, and it is believed that warrant financing will eventually become an important way for M&A financing of Chinese enterprises.

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