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The method of payment choice in M&A

Selection of suitable Mergers and Acquisitions Payment overlays the roadmap for successful Merger and Acquisition (M&A). The different payment methods of Mergers and Acquisitions have other impacts on the monetary status, capital structure and control of the purchasing company after M&A. Apolo Lawyers(Tel: (+84) 903.419.479) will help our clients consider legal issues relating to the method of payment choice in M&A which will reduce the risks in an M&A transaction. 

Payment methods of Mergers and Acquisitions (M&A) consist of leverage payment, security and cash payment. 

1. The payment method of Merger and acquisition (M&A) 

Payment methods of Mergers and Acquisitions refer to the financial tools used by the companies to complete the business transaction. The payment method of M&A consist of:

1.1 Security Payment

It refers to a payment method in which the acquiring company rolled out new securities for purchasing the valuable assets or shares of the target companies, and it consists of the following forms:

Share Payment: With this payment, the acquiring company rolled out new stocks for buying the stocks or assets of the target firms. Among which, the most broadly-used form is the share exchange by which buying company pays the share directly to the target entity to buyout stock and assets;

Bond Payment: With such payment, the acquiring companies issue a corporate connection to buy the assets or share of the target companies. As a payment method with Merger and Acquisition, this category of connection has a huge credit rating and negotiability.

1.2 Share-based payment 

Stock M&A is a way of issuing and changing shares to achieve the target property, or to obtain control of the company. Advantages of stock acquisitions: stock deal size is relatively large, is not eligible for existing capacity constraints; after the completion of the stock M & A transaction, shareholders of the target company do not lose its ownership interest; shareholders of the acquired company to enjoy tax deferral and low tax concessions. The disadvantage stock M & A: the acquirer to make an existing shareholding structure changes, may face the risk of losing control of the company; issuing new shares may make equity and net asset value per share decreased. 

1.3 Leveraged Buyout (LOB)

Leveraged buyout refers to a payment method through which purchasing firms finance capital with M&A via increasing debts. Under this payment method, the purchasing firms take the future operating cash flow of the target firms as pledges to raise debts to finance capital via investors and then buy out the ownership of the target firm with cash payment. When contrasted with bond payment, LOB leads to a higher capital cost, as the interest of bank loans is significantly higher than that corporate bonds.


2. Factors to consider when choosing the payment method of M&A. 

In currently market environment and institutional context, the method of payment choice have many complex factors. This paper analyzes the main factors are: financial position and capital structure, mergers and acquisitions purposes, shareholders and management considerations, financing capabilities, tax planning and M & A market maturity. 

2.1 Financial situation and capital structure 

Generally, the higher the current ratio, have sufficient own funds and a stable cash flow, the stock market has been seriously undervalued companies appropriateness of using cash, because if you take equity payment, issuing stock only shareholders will be diluted earnings per share, and the company stock will be undervalued and underestimated the market shares determined on the basis of price and exchange ratio of new shares, the acquiring party need to pay more for stocks. In the asset-liability ratio is higher, less own cash, assets illiquid and stock is overvalued situation, you should choose equity or cash payments relatively small mixing payments. 

2.2 The purpose of acquisition 

The main purpose of M & A can be divided into RTO, financial restructuring, and strategic restructuring. If the main purpose is to RTO, the best choice is to change assets to pay, because the company RTO often poor financing, changing high quality assets acquisition often able to achieve a win-win both mergers and acquisitions. If the main purpose of the acquirer is a financial reorganization, the best option is to pay cash due to financial restructuring aimed at improving the quality of finances and avoiding financial risks, optimizing the capital structure, only cash M & A to meet these requirements. The optimal choice is share-based payments for the strategic reorganization, such payments can make the target company increase their investment and control the power of the acquired company 

2.3 Shareholders and management considerations 

Since then shareholders and management will consider what payment methods to their advantage, so shareholders and management considerations and requirements will affect their payment method of choice. The concern of M&A shareholder concern is to maintain control and increase earnings per share, if the M&A side shares dispersed, corporate shareholders, will choose cash payment, because in this way does not affect the controlling position as a major shareholder. If management companies hold shares, the share-based payment issuance of new shares will dilute their ownership of the business, so they are willing to choose cash payment. 

2.4 Financing capacity

Our M&A are mostly internal financing surplus was mainly due to the lacks of strong support for M & A, corporate M & A financing channels for small, high financing costs, and lack of financing capacity of the current financial system. Due to limited financing capacity, corporate mergers and acquisitions Payment Options are also affected. The larger the company, with more tangible assets as collateral for business, often a strong financing capability, they use more cash. 

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2.5 Tax arrangements 

For acquirer, to borrow or issue bonds to raise money to pay for the M&A price, the cost of which may be charged interest before tax, while the cost of equity capital is only charged tax. So they may be more inclined to pay cash to reduce tax costs. For the shareholders acquired, if cash payment, it must pay income tax immediately. So they may be more inclined to issue stock. 


2.6 M&A market maturity 

The level of M&A market development and legal sophistication can influence the way of payment. Mature M&A market, it may be more inclined to the use of stock payment. But our M&A market started late, immature securities companies, investment banks, accounting firms and other intermediaries in the M & A market limits the choice of payment method of choice.

Investors who have questions about the choice of payment method as well as legal issues surrounding payment when doing business mergers and acquisitions, do not hesitate to contact us. Apollo Lawyers is a law firm operating on the foundation of taking prestige and responsibility first. Our lawyers are high-professional and experienced, always working with dedication, enthusiasm, and efficiency. We always provide professional legal services with outstanding quality. If you want to know more detail about our service, please contact Apolo Lawyers via email at or Hotline - (+84) 903419479 for the best legal advice and support.


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