Equities and bonds: how to value them in your M&A analysis?
Long-term financing is a key element in the growth and sustainability of a business. Companies have several options for obtaining long-term financing, including common stock, preferred stock and bonds. Each of these methods of financing has its advantages and disadvantages and evaluating them is critical to the M&A analysis.
Read more: Focus on Sales-Structurer in banking
Common shares: a source of long-term financing for companies
Common share is a very common type of long-term financing for businesses. Common shareholders own a portion of the company's property and are entitled to a dividend based on the company's earnings. Common stock has the advantage of not having a maturity date, unlike bonds, which allows the company to benefit from long-term financing. However, the issuance of common stock dilutes the ownership of existing shareholders, which can be perceived as a threat to the control of the company.
Preferred shares: a secure but dilutive financing option for companies
Preferred shares are another type of long-term financing for businesses. Preferred shareholders have limited voting rights but receive a fixed dividend that is paid before common shareholders. Preferred shares can be converted into common shares at any time, allowing the company to remove them from its balance sheet if necessary. Preferred shares offer investors a higher level of security than common shares, due to their fixed dividend. However, converting them into common stock can dilute the ownership of existing shareholders, as with common stock.
Bonds: an attractive alternative to equity issues
Bonds are a third form of long-term financing for businesses. Bonds are debt instruments issued by the company that guarantee a fixed interest payment to investors, as well as repayment of the debt at a specific maturity date. Bonds are generally considered a safer investment than stocks because they offer a fixed source of income. However, issuing bonds increases the company's debt, which can be considered a constraint on future investments. In addition, bonds have a fixed maturity date, which means that the company must repay the debt on that date, regardless of its earnings or cash flow.
Valuation in the analysis of mergers and acquisitions
Assessing long-term financing arrangements is critical in M&A analysis. When a company is considering a merger or acquisition, it must assess the quality and quantity of the target company's equity and debt.
If the target company has a high proportion of preferred stock and bonds, this may impact the pending transaction. For example, if the target company has a large proportion of bonds with near-term maturities, this may affect its ability to invest in new projects. Similarly, if the target company has a large proportion of preferred shares, this may make the transaction more expensive for the acquirer, as it will have to pay a fixed dividend to the preferred shareholders.
On the other hand, if the target company has a high proportion of common stock, this may be seen as a sign of stability and confidence in the company. Common shareholders may also be more flexible in terms of dividends, which may make the deal easier to negotiate.
Valuation in the analysis of mergers and acquisitions
It is important to consider the dangers associated with each financing method. Bonds, while offering a fixed return, may be subject to interest rate and credit risk. Common and preferred stocks, on the other hand, are subject to market risk and can be subject to significant price fluctuations.
In conclusion, businesses have several options for long-term financing, each with its own advantages and disadvantages. Common stock, preferred stock and bonds are the most common forms of financing. Evaluating these financing alternatives is critical in M&A analysis, as they can have a significant impact on the price and feasibility of the transaction.
Read more : SRI, green, solidarity investment: how to find your way around?
