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The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions by H. Kent Baker, Halil Kiymaz

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CHAPTER 12

Sources of Financing and Means of Payment in M&As

MARINA MARTYNOVA

Associate, Cornerstone Research and Research Fellow, Tilburg University

LUC RENNEBOOG

Professor of Corporate Finance, Tilburg University

INTRODUCTION

Two of the major considerations in any takeover transaction are the choice of takeover financing sources and the means of payment. Although frequently considered as synonymous, these two considerations are driven by distinct determinants, and investors take into account the information signaled by the choice of both the payment method and financing sources.

The sources of takeover financing comprise the way an acquiring firm raises capital to fund an acquisition of another company. Financing sources can be classified into three general categories: (1) internally generated funds, (2) equity issues (including public and private equity placement), and (3) debt issues including issues of bonds or loan notes and borrowing from a bank. Many acquiring companies use more than one source to finance their takeovers. The means of payment is what the acquiring firm is actually offering to the target's shareholders in exchange for their shares. This can be equity of the acquiring (or combined) firm, cash, loan notes, or a combination thereof. Despite being closely related, the takeover financing sources and payment means do not always coincide. Financing the takeover with internally generated funds or with debt implies that the acquisition is entirely paid with cash. ...

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