CONTENTS
- 1. Acquisition Finance | Concept
- - The Need for Acquisition Finance
- 2. Acquisition Finance | Types
- - Debt-Type Acquisition Finance
- - Equity-Type Acquisition Finance
- - Hybrid-Type Acquisition Finance
- - Leveraged Buyout-Type Acquisition Finance
- 3. Acquisition Finance | Procedure
- - Procedure Guide
- 4. Acquisition Financing | A Strategy for a Successful M&A
- - Do You Need the Assistance of an Attorney?
1. Acquisition Finance | Concept
Acquisition finance refers to a financial service that raises the funds needed for a corporate merger and acquisition (M&A).
In other words, it is a method by which, when one company acquires or merges with another, the necessary funds are raised through loans from financial institutions such as banks or securities firms.
In particular, since the introduction of the comprehensive financial investment business operator system in 2013, securities firms have also been able to carry out acquisition finance work, which has further broadened the scope of fundraising.
The Need for Acquisition Finance
M&A transactions are often worth trillions of won, so acquiring a large company with only a small amount of equity capital is not easy.
Accordingly, acquisition finance may be needed in order to raise the funds required during the acquisition process.
In a narrow sense, acquisition finance means that the acquirer, or a special purpose company (SPC) established by the acquirer, obtains a loan from a financial institution.
In a broad sense, it includes not only borrowing but also raising funds in the form of equity from financial investors.
2. Acquisition Finance | Types
Acquisition finance is divided into various forms according to its purpose and the method of raising funds.
Representative examples include the debt type, the equity type, the hybrid type, and the leveraged buyout type among others.
Debt-Type Acquisition Finance
Debt-type acquisition finance is a method in which the acquirer borrows funds from a financial institution to raise the acquisition funds.
The acquirer obtains a loan from a particular financial institution to purchase the shares or assets of the target company, and thereafter repays the loan using the cash flow or assets of that company.
Equity-Type Acquisition Finance
Equity-type acquisition finance is a method in which the acquirer, together with an external financial investor, makes a capital contribution to establish a special purpose company (SPC) and acquires the shares of the target company through it.
This structure has the advantage of reducing the acquirer's financial burden, but close cooperation with the investor is critical.
Hybrid-Type Acquisition Finance
Hybrid-type acquisition finance is a method in which a strategic investor and a financial investor jointly make capital contributions to establish a special purpose company (SPC), and this SPC borrows funds from a lender group to carry out the merger and acquisition.
In other words, it can be described as a form that combines external borrowed funds with equity investment by investors.
Leveraged Buyout-Type Acquisition Finance
Leveraged buyout-type acquisition finance is a form in which, when the acquirer borrows funds from a financial institution, the assets held by the target company (such as real estate or securities) are provided as collateral, and those funds are used to acquire the shares of the target company.
In this case, the debtor is the acquirer, and the collateral provider is the target company.
3. Acquisition Finance | Procedure
The acquisition finance procedure is as follows.
② Discussion of fundraising with the lender group
③ Raising the funds and executing the acquisition transaction
④ Post-transaction management and operation of the loan repayment structure
Procedure Guide
In acquisition finance, first, the acquiring party sets up the acquisition structure and establishes the method of raising funds and the structure for allocating risk.
After that, the party discusses the terms of borrowing the acquisition funds, the form of collateral, the repayment terms, and similar matters with the lender group, including financial institutions, and legal and financial due diligence is also conducted during this process.
Once the fundraising is confirmed, the acquirer uses its equity capital and the borrowed funds to acquire the equity of the target company, and at the same time the transaction is executed through the conclusion of related contracts, the disbursement of funds, and the transfer of equity.
After the acquisition, the acquirer repays the interest and principal owed to the lender group using the profits generated by the target company, and this structure is operated with the eventual recovery of the investment in mind.
4. Acquisition Financing | A Strategy for a Successful M&A
Acquisition financing is the first key factor to consider for a successful M&A.
Designing an acquisition financing structure suited to the transaction at the early stage of a project allows funding to proceed smoothly and can reduce the burden on both investors and the acquirer.
Among the various forms of acquisition financing, carefully selecting the method that fits each transaction situation and objective is important, and the process of cooperating with investors, reviewing legal risks, and concluding contracts with financial institutions must be managed systematically.
To this end, having financial, legal, and tax professionals work together to take an integrated and strategic approach plays a decisive role in the success of an M&A.
Do You Need the Assistance of an Attorney?
In the acquisition financing process, not only funding but also complex legal, tax, and accounting issues arise at the same time.
In particular, the legal issues are varied, including the conclusion of financial contracts, the establishment of security, the protection of investor rights, and compliance with regulations related to acquisition financing.
Our firm comprehensively analyzes the client's acquisition structure and funding plan, and provides tailored legal advice and risk management strategies.
In addition, through collaboration with tax accountants, certified public accountants, and labor attorneys, we also prepare measures to review and respond to problems that arise during the acquisition process.
We provide a one-stop service that reviews in advance all problems that may arise throughout the entire acquisition financing process, and responds promptly and systematically to any disputes that may occur.
If you are facing difficulties with acquisition financing, please feel free to request the assistance of a mergers and acquisitions attorney at Daeryun Law Firm at any time.
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