Financing and Refinancing

Of all aspects of the merger/acquisition/buyout process, perhaps none is as critical as financing. There is no such thing as a free merger: it takes money to buy a company, and the money must come from somewhere. At the simplest level, all transactions are paid for in the form of cash, stock, and/or notes, but behind these three basic modes of payment lies a complex universe of funding sources and issues.

■  If the deal is funded from cash, will the cash be generated internally from profits, or will it be borrowed? If it is borrowed, will it come from a traditional commercial bank or from a less traditional source, such as a commercial finance company, a leasing company, or a life insurance company? How many lenders will be involved and under what terms?

■  If the deal is funded by stock, will the stock come from existing shares or from newly issued shares—and if the later will this be from a public offering or a private placement? Will a private equity firm be involved in the deal and, if so, how much control will it want over the company’s operations going forward?

■  Will the seller accept promissory notes as part of the payment? For example, can part of the price be paid out as a contingency payment, based on company performance?

In the dynamic terrain of financial dealmaking, much depends on written agreements between buyers, sellers, and various third parties (including, but not limited to, commercial bankers), all of whom are betting on the future. Creativity, negotiating skills, and a keen eye for detail can make the difference between success and failure here.

This chapter begins with an overview of financing sources, followed by a brief discussion of equity sales as a source of capital. The remainder of this chapter will focus on debt. We will focus on highly leveraged transactions (HLTs) with an emphasis on leveraged buyouts (LBOs)—that is, taking publicly held companies or units private using borrowed cash. Some of the principles described here are also applicable to the less-leveraged acquisitions, but we will not take pains to point out such broad applications.