Different Payment Methods for Merger & Acquisition

The word “Merger” means the combination of two or more entities that consent to do so in order to create a new company. Additionally, the merger procedure is carried out with the purpose of expanding business growth, as well as its reputation and customer base. While an acquisition is a legal transaction in which an acquirer business buys a target company.     

Leverage payments, cash payments, and security payments are all acceptable payment methods. The various payment methods of mergers and acquisitions have distinct effects on the purchasing entity’s capital structure, financial situation, and control. The performance of a merger and acquisition is also impacted by the method of payment.     

Types of Mergers in Companies

Vertical Merger
 

It is the merging of two or more organisations that perform a variety of chain functions for shared goods and services. The purpose of a merger is often to increase synergies, gain more control over the supply chain and boost the company’s reputation.  

Horizontal Merger
 

When businesses involved in the same industry merge, it becomes apparent. This horizontal merger seeks to effectively utilise scale efficiencies and cost-based exchanges.   

Market Extension Merger
 

It occurs between two businesses that operate in distinct marketplaces but deal in a similar product. Making sure that the merging companies have access to a bigger market is the main goal of this merger.   

Conglomerate Merger
 

It alludes to a union of businesses engaged in different commercial endeavours. While combined conglomerate mergers include companies looking to expand their market or product offerings, it consists of businesses covering several operational sectors.  

Product extension Merger
 

It stands between two organisations that deal with similar products and compete in the same market. Due to the ability of the merging companies to combine their products and get access to a huge market, they will earn greatly from the merger.    

Common Payment Methods for Mergers and Acquisitions
 

The financial methods employed by the companies to execute the business transaction are referred to as payment methods of mergers and acquisitions. The merger and acquisition  payment methods include:   

1. Cash Payment 
 

This payment method is widely employed across all business sectors due to its ease and transparency. For businesses, paying in cash upfront seems more dependable and simple than other payment methods. Although cash is the most practical form of payment, it becomes obsolete when transaction costs are high.     
 

2. Security Payment 
 

The purchasing firm issues fresh securities under a security payment method in order to purchase the assets or stock of the target companies. It contains the following forms: 

Share Payment: The purchasing company issues new shares in exchange for this payment in order to purchase the stock or assets of the target companies. The most popular of which is the share exchange, in which the buying company pays the target entity directly in shares to purchase its stock and assets.    

Bond Payment: With such payment, the acquiring companies issue a corporate bond to buy the assets of shares of the target companies. As a payment method for Mergers and Acquisitions, this category of bond has a huge credit rating and negotiability.  

3. Leveraged Buyout
 

It refers to a method of payment whereby acquiring companies raise debt in order to fund capital during mergers and acquisitions. In this method, acquiring companies use the target companies’ expected operating cash flow as a pledge to expand debt in order to raise capital from investors, and they subsequently pay cash to acquire the target companies’ ownership. Leveraged buyout results in a greater capital cost as compared to the bond payment because bank loans have a much higher interest rate than cooperative bonds.   

Importance of Shares for Payment Methods of M&A
 

Market conditions play an important part in M&A transactions. Management may exchange shares for the stock when a buyer's shares are overvalued. These shares have essentially been recognised as a type of currency.     

Since the price of the shares is considered to be somewhat higher than their current value, paying with stock allows the acquirer to make a larger profit. If the management decides that the acquirer’s stake is undervalued, they may have to pay cash for the acquisition. By treating shares like currency, it would purchase additional shares that were trading at a discount equal to the acquisition’s intrinsic value.      

In reality, there might be some other reasons why a corporation would want to pay with shares rather than cash and why the acquisition is being thought about, i.e., buying a company with tax losses so that they can be recognised right away and the acquirer’s tax burden is significantly lowered.

Unlike an acquisition, which involves one company purchasing another, a merger involves two companies entering into a contract to create a new company;

• A merger and acquisition can be paid for using cash, equity, or a combination of the two. 
• How it is paid for frequently shows how an acquirer views the relative value of the company's share price.

Conclusion 
 

There are alternative methods of financing merger and acquisition that, in many cases, lead to a smooth transaction where cash is not practically relevant. The asset prices, share positions, and debt obligations of the buyers and sellers determine the appropriate payment option to use. Every way of financing an M&A entails specific risks and obligations, so it is up to the parties to use due diligence before conducting a deal. If you are thinking of merging with another company, contact our experts at Online Legal India for helpful legal advice.