How Does Acquisition Financing Work? Financing of company acquisitions in the international group


Hausarbeit, 2021

19 Seiten, Note: 1,0


Leseprobe

Table of contents

1 Preliminary Consideration

2 Concept of Corporate Acquisition

3 Determinants of Acquisition Success

4 Types of Corporate Acquisitions
4.1 Share Deal
4.2 Assets Deal

5 Corporate Acquisitions and their Financing Problems

6 Financing Opportunities and Risks in the International Group
6.1 Acquisition Financing through Intra-Group Financing
6.2 Acquisition Financing through Group External Financing
6.3 Acquisition financing through Intra-Group External Financing

7 Results

I Publication bibliography

1 Preliminary Consideration

Companies are not static entities. Internationalisation and globalisation force them to permanently review strategic decisions once they have been made. The goal must be to position themselves efficiently in the strategic triangle (company - market/ customers - competition/ rivals), to create competitive advantages and thus to take full advantage of both global and local market opportunities. The result is constant movement in the international corporate landscape.1,2

There are spin-offs, spinouts, sales, additions to the core business, strategic alliances, and other entrepreneurial partnerships, as well as an associated increase in a corporate grouping. Through cross-border diversification, a globally operating network is to be institutionalised that can use global transaction cost advantages and that, as a multinational enterprise, can react to the challenges of globalisation to achieve economies of scale, scope and speed by revising or redefining the internationalisation strategy.3,4

The acquisition is the most suitable "pro-active" instrument for efficient portfolio management. It enables the immediate utilisation of existing markets, capacities, infrastructure, and know-how. The financing of the acquisition has a considerable influence on the design, implementation, and integration process. This applies more as financing that is too risky or not calculated interactively in the balance sheet and financial planning can endanger not only the existence of the acquired company but also that of the acquiring company. Solidly planned and implemented financing from the outset is one of the essential foundations of sustainable acquisition success.5

In the following, therefore, the financing options and their effects in an international group company are presented, but not without pointing out that each acquisition case is an individual case that cannot be developed through a recipe book. During this, suitable practical examples are presented.

2 Concept of Corporate Acquisition

A comprehensive definition of the term "company acquisition" is not possible due to the lack of a precise definition of the term "company" in German law.6 For this reason, it is usually combined with the term "mergers & acquisitions" to describe all forms of concentrative mergers, following the Anglo-American pragmatism, without precise delimitation.7

However, a more differentiated view is appropriate. The essential feature in each case is the transfer of economic power of disposal and control to the acquiring company, but in the case of an acquisition, in contrast to a merger, the legal identity of the acquired company and the legal consequences associated with it regularly remain. The demise of a legal entity during a merger, on the other hand, has consequences for the (partly co-determined) performance bodies, for accounting and publicity obligations as well as for the risk and liability structure of the company.8

3 Determinants of Acquisition Success

Corporate acquisitions are part of a company's growth strategy that is aligned with the company's ultimate goals. The decision-making criterion for their implementation must therefore be their contribution to long-term profit or corporate value maximisation.9

The consideration of an acquisition in the net present value model shows that its advantageousness is determined by the purchase price paid, the calculation interest rate, and the uncertain cash surpluses that can only be estimated ex-ante. However, such a view - without taking interactions into account - is wrong. Rather, an assessment must be made based on a comprehensive, "integrative" assessment of the acquisition investment option that considers the growth strategy. The present value of the future cash flows after the acquisition should be greater than the sum of the net cash flows if the companies were to go it alone, to create an added value in the sense of neoclassical investment theory, which the shareholders cannot achieve through their portfolio diversification.10,11

Since the overall performance capacity after the merger is regularly greater than the sum of the individual parts, such added value over and above the actual earnings value of the merger candidates can be created. Ansoff describes this strikingly as the "2 + 2 = 5" effect (positive synergy effect). However, many managers have paid a considerable lesson to realise that now of acquisition there are only synergy potentials that do not necessarily have an impact but depend on the integration and restructuring performance of management. Also, 2 + 2 can result in only 3. In addition to the purchase price, the calculation of interest rate, and the degree of realisation of the forecast cash surpluses, the correct assessment and exploitation of synergies thus determine the success of the acquisition.12,13

4 Types of Corporate Acquisitions

When structuring corporate acquisitions, 14 two basic forms can be distinguished - the share deal and the asset deal. For both, the partly different civil law, tax law and financing law principles and consequences must be explained.15

In the absence of special company purchase law, the civil law consideration of the obligation and disposal transaction for both forms is carried out according to the general regulations on the purchase according to § 433 German Civil Code (BGB).16

4.1 Share Deal

In a share deal, the purchase of a company takes place through the transfer of company shares. It is therefore a legal purchase within the meaning of § 453 of the BGB in which the provisions on the purchase of goods apply mutatis mutandis.17,18

The company remains the owner of the enterprise. Only the owner of the company rights changes. Therefore, there is no transfer of individual assets and liabilities. By assigning the company's rights, the buyer enters the seller's rights and obligations vis-à-vis the company using universal succession. If the sold company is a partnership, the special business assets are not included in the transfer of participation. It may then be necessary to conclude additional purchase agreements with the partner. The partnership experiences a further special feature in tax law. Here, the acquisition of a shareholding is treated in the same way as the purchase of individual assets (asset deal).19,20

Regular objectives in the tax structuring of the acquisition are the transfer of the purchase price into depreciation volume, the deductibility of the financing costs and the use of any existing loss carryforwards.21

A transformation of the purchase price into depreciation volume is not possible since the acquired shares in the capital company cannot be used to increase the property company. Although the buyer can deduct the interest expenses in connection with the acquisition of the shareholding, only the profit distributions and not the assets of the special-purpose company can be used for their financing due to the capital maintenance regulations under company law.22,23

If the acquired corporation retains its economic identity, the acquirer benefits from existing loss carryforwards.24,25

An acquisition from the fashion retail sector can serve as an example of a share deal. Outfittery and Modomoto joined forces in 2019 - using a share deal, Outfittery took over Modomato. Only Outfittery remained as a brand. "Seven-year-old Outfittery is tying up with the smaller Modomoto in an all-share deal, expanding the online menswear business that in effect works as a personal shopper for its growing customer base"26 - Reuters reported. The reasons for the share deal were, above all, from Outfittery's point of view, an increase in turnover of approx. 50% as well as a securing of its market position in the supremacy in the curated shopping segment.

The deal was financed primarily by venture debt, which sometime later caused the company to stumble due to its high fixed interest rates.27

4.2 Assets Deal

In an asset deal, the acquirer usually buys the company as a tangible entity by taking over the assets, intangible assets, and liabilities. The individual disposal transactions for the transfer of ownership must be separated from the obligation transaction for the sale of the entire company.28

During the acquisition process, the assets are transferred to the business assets of the acquirer. The difference between the purchase price and the net assets taken over must be distributed to the individual assets and liabilities up to their partial values by increasing the book value following the step theory of the Federal Fiscal Court and the residual value must be recorded as goodwill. This leads to the creation of depreciation potential and thus, under certain circumstances, to an increase in the cash flow for financing the purchase price from the acquisition object. Also, in contrast to the share deal, the assets taken over are immediately available as collateral for debt financing.29,30

A prominent example of an asset deal recently took place in the USA: Disney bought Fox for over 70 billion US dollars. However, not the entire company was acquired, but only the film studio 20th Century Fox and parts of the Fox Television Group. Fox News, for example, remained untouched by the deal.31

5 Corporate Acquisitions and their Financing Problems

Corporate acquisitions are usually long-term, strategic investments that result in a correspondingly long-term capital commitment. Since the required funds are only available in exceptional cases in "filled war chests", it sounds almost trivial that solid financing is the basis of acquisition success. To avoid failures, this must therefore be project related. Only in this way can the connection between financing and profitability of acquisition be considered and an optimal capital structure created.32

When selecting financing instruments, the financial situation of the buyer and the state of the financial markets must be considered. The use of debt capital is advantageous if the "acquisition yield" is greater than the interest rate on debt capital. The return on equity then increases as the debt ratio rises (leverage effect). However, it should not be overlooked that the future is uncertain, and the overestimation of future earnings leads to the inability to control interest rates - thus to the reversal of the positive leverage effect into a negative one.33,34

Against this background, the buyer company should not exhaust its financial leeway completely but keep reserves for the future in the sense of a sustainable internationalisation strategy.35

6 Financing Opportunities and Risks in the International Group

From an economic point of view, the group presents itself as an economically uniform but legally multi-unit enterprise. The legal distinction in financing theory between internal and external financing and between equity and debt capital takes on a new dimension. In addition to external financing by third parties, the economic unitary enterprise group offers the possibility of internal-external financing in the form of equity or debt financing (intercompany loan) between the individual legally independent group companies.36,37

The group is active in several legal areas not only in the utilisation of services but also in the provision of services. It has direct access to the local credit and capital markets, for the financing of foreign companies and activities. Their use by the foreign companies themselves, the parent company or its financing companies should enable financing in the same currency and thus in a currency-neutral manner, while at the same time exploiting country-specific capital market advantages.38,39

[...]


1 Ct. Hitt et al. 2001, p. 9 ff.

2 Ct. Sudarsanam 2010, p. 65 f.

3 Ct. ibid.

4 Ct. Gregory and Cooper 2000, p. 53 f.

5 Ct. Hitt et al. 2001, pp. 31, 33.

6 Ct. Picot 1998, p. 15 f.

7 Ct. Dauber 2012, p. 2 f.

8 Ct. Das and Kapil 2012, pp. 284-330.

9 Ct. Cooper and Finkelstein 2014, p. 2 f.

10 Ct. SHRIEVES and WACHOWICZ 2001.

11 Ct. Panageas 2005, pp. 2-7.

12 Ct. Schade 2013, p. 13.

13 Ct. Ansoff 2007, p. 97.

14 Presented for and based on the domestic case.

15 Ct. Meynerts-Stiller 2019, 9-12.

16 Ct. Hölters and Bauer 2010, p. 522.

17 Ct. Vogel 2002, p. 10.

18 Ct. Alickovic and Brauweiler 2020, pp. 233-243.

19 Ct. ibid.

20 Ct. Semler and Volhard 2001, p. 524.

21 Ct. Hooke 2015, pp. 275-285.

22 §§ 57 para. 1, 3 and 59 AktG (Aktiengesetz), § 30 para. 1 GmbHG (Gesetz betreffend die Gesellschaften mit beschränkter Haftung)

23 Ct. Bunsen 2019, pp. 844-850.

24 Ct. Semler and Volhard 2001, p. 525.

25 § 8 para. 4 KStG (Körperschaftsteuergesetz)

26 extracted from Douglas Busvine 2019.

27 Ct. Christina Kyriasoglou and Jonas Rest 2020.

28 Ct. Alickovic and Brauweiler 2020, p. 234 f.

29 Ct. Gleich et al. 2010, pp. 20-27.

30 Ct. Schramm 2003, p. 31 f.

31 Ct. Madeline Berg 2019.

32 Ct. Gleich et al. 2010, p. 29 ff.

33 Ct. Tanna et al. 2021, pp. 1-30.

34 Ct.Hooke 2015, pp. 70-73.

35 Ct. ibid.

36 Ct. Levi 2009, p. 373 ff.

37 Ct. Assef, Sherif, and Elizabeth Patrun.

38 Ct. ibid.

39 Ct. Inderst and Müller 2003, pp. 1033-1062

Ende der Leseprobe aus 19 Seiten

Details

Titel
How Does Acquisition Financing Work? Financing of company acquisitions in the international group
Hochschule
FOM Hochschule für Oekonomie und Management gemeinnützige GmbH, Hochschulstudienzentrum Hamburg
Veranstaltung
International Investment
Note
1,0
Autor
Jahr
2021
Seiten
19
Katalognummer
V1007018
ISBN (eBook)
9783346391803
ISBN (Buch)
9783346391810
Sprache
Deutsch
Schlagworte
M&A, Investment, Akquisition Financing, international group, Mergers & Acquisitions, Mergers and acquisitions, internal financing, Eigenfinanzierung, group financing, external financing, concern financing
Arbeit zitieren
Felix-Sebastian Ament (Autor), 2021, How Does Acquisition Financing Work? Financing of company acquisitions in the international group, München, GRIN Verlag, https://www.grin.com/document/1007018

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