What is the best option for financing an acquisition transaction? – The Irish Times.

The mergers and acquisitions (M&A) market in Ireland has been performing well in recent years, and the improving interest rate environment and falling inflation are expected to result in a fourth consecutive year of around 400 deals per year, which compares very well with historical levels.

These transactions were financed through a variety of financing methods, reflecting the wider range of financing options currently available in the market.

Broadly speaking, deals are typically financed from three sources; a company’s internal resources, debt, external capital or a combination of all three, notes Colm Sheehan, director of corporate finance at Crowe.

If a company has internal resources, it must consider whether an acquisition is the best use of that capital or whether it could be used elsewhere, he notes. For example, can you take out debt to finance an acquisition and use the internal capital for other capital expenditures or expansion projects?

“When it comes to debt, the key question is what is the company’s ability to raise the required level and what is its ability to repay?” says Sheehan. “Typically, debt is a cheaper form of financing than equity, but it places a greater burden on short-term cash flow/liquidity.

“Equity can be a useful source of capital, provided you are happy to sell some of the future value of your business. Private equity can add value to your business through the intangibles it brings, such as expertise, networks, management and complementary financing.

According to Enda Grenham, director of investment banking debt advisory at Goodbody, the financing options a company may consider will depend on a number of factors. These will include the size of the target relative to the size of the acquiring entity, the existing level of debt, the sector in which the company operates, the existing level of debt and cash, and whether a significant component of the acquisition price may be in the form of deferred repayment of compensation or equity in the enlarged company.

“Many of the deals we see are backed by private capital, and these companies typically have a compelling track record of future growth supported by a solid business plan,” says Grenham.

“The use of deferred payments or supplier notes can also help reduce the initial upfront financing requirement and reduce risk for the buyer where the payment of deferred cash is tied to achieving a target goal in line with its forecasts.”

In most cases, external financing will be the most effective way to finance a merger or acquisition.

“Companies are usually quite busy managing the day-to-day running of the business,” Grenham says. “The addition of the complexity and effort of executing significant M&A and financing processes will strain the resources of most companies’ finance departments, so it makes sense for them to use external support for significant transactions to ensure optimal outcomes are achieved. “

Stephen McCarthy, director of business development at Bibby Financial Services, says several factors influence a company’s choice of M&A financing structure. The cost of capital is a key factor because debt is usually cheaper, while equity avoids risk but dilutes ownership. In each case, you should seek professional legal and tax advice to choose the best solution for investors, he advises.

He notes that companies are increasingly using a variety of methods to finance acquisitions, including cash reserves, debt, equity and hybrid methods. Another option they may consider is invoice financing.

“Invoice finance gives businesses access to outstanding funds from unpaid invoices, helping them to access income they have already earned but not yet received. This means they can use their own funds to finance larger development plans without having to borrow money,” says McCarthy.

With central banks cutting interest rates in Europe and around the world, the market is showing an increased appetite for financial transactions, says Ronan Murray, corporate finance partner at EY Ireland. He says his company is seeing a significant increase in requests from clients across Ireland and beyond for support with its M&A programs.

“In addition to stabilizing interest rates, falling inflation also makes finance more accessible and plays a key role in stimulating mergers and acquisitions as companies look to support growth, divestment and other strategies,” Murray says.

“At EY, we are seeing strong growth in our M&A practice based on activity in calendar year 2024. Deal volumes are growing, driving more foreign capital (both debt and private equity) into Ireland. There is great optimism that transaction growth will continue in the coming months.”

Murray says having the financial resources in place before an acquisition can come with benefits in terms of speed, competitiveness and flexibility.

“With a financing provider from the beginning of the process, buyers have a strong negotiating position while also being able to act quickly on execution – including completing due diligence and transaction documents,” says Murray.

“It also gives buyers the flexibility to transact as they are better able to take advantage of unexpected acquisition opportunities.

“From the seller’s perspective, this improves the credibility of each offer and reduces the risk of a failed transaction. In the transaction process, certainty of funds may be the difference for the seller when considering offers for his business, especially in the case of medium-sized companies, i.e. companies with a transaction value ranging from EUR 10 million to EUR 250 million.”

McCarthy agrees, adding: “Pre-financing offers companies a number of benefits during M&A processes. This allows them to act faster and more confidently, making their offers more attractive to sellers. Pre-financing also strengthens their negotiating position, enabling them to secure better terms.

“It further insulates the buyer from market volatility and rising financing costs because they do not have to secure expensive and time-sensitive capital. Moreover, it provides flexibility, enabling companies to benefit from opportunistic trades regardless of market conditions, ultimately reducing risk and strengthening strategic options.

Sheehan adds that pre-financing reduces the complexity of the transaction.

“From a seller’s perspective, it is always better to transact with a buyer who is not dependent on external financing,” he says. “The fewer parties that have to become familiar with the proposed contract, the lower the risk of its implementation. Sellers will need to weigh the pros and cons of any offers they receive, but based on similar findings, internally financed offers are more favorable, especially in current credit conditions.

( The number of mergers and acquisitions in Ireland will skyrocket in the three months to JuneOpens in a new window )

However, having financing may not be an option for everyone and should not be a barrier to a successful acquisition if the acquiring company is in good shape and can demonstrate that it makes a case for the acquisition.

Grenham says that when buyers can demonstrate their credibility and have supportive financial service providers, this is usually enough to enable them to progress through the sales process and give them time to complete initial analysis and arrange financing before an offer is confirmed and fully funded. required.

“There are costs associated with arranging and maintaining committed financing, and where companies only want to pursue rare, opportunistic acquisitions rather than pursuing an ongoing program, there may be little justification for maintaining such facilities unless there is a clear acquisition plan,” he said. says.