When looking to acquire a business, companies can choose stocks if the target company belongs to a volatile industry or does not have stable cash flow. Because equity financing has no deadlines or payment expectations, it is also more flexible than alternatives. A company would choose debt financing over equity financing if it doesn't want to hand over any part of its company. A company that believes in its finances would not want to lose the profits that it would have to transfer to shareholders if it ceded the capital to someone else.
Types of Equity Funding for Acquisitions
Equity funding for the acquisition of a company can take many forms and depends largely on the structure of the acquisition. For example, a public or private company can buy all or part of the shares of another company by issuing its own shares to sellers. Similarly, a merger can be fully or partially financed by shares issued by the purchaser. Even a business acquisition in the form of the sale of assets can be carried out by giving the seller all or part of the consideration in the form of equity securities. On the other hand, intermediate debt and preferred capital play a very similar role in the capital structure of a company.Both public and private companies may also consider using preferred shares or other preferred equity securities as acquisition consideration. Many private equity acquisitions are made with all or part of the private equity fund's contribution in the form of preferred stock. Public companies often use equity financing as their preferred form of payment in mergers and acquisitions transactions.
Equity Financing Instruments
Equity financing involves the sale of common stock and other equity or quasi-equity instruments, such as preferred shares, convertible preferred shares, and equity interests including common stock and warrants. Keep in mind that preferred secured lenders financing an acquisition may consider preferred equity in a similar way to intermediate debt.For example, angel investors and venture capital investors, who are the first investors in a startup, prefer convertible preferred shares over common stock in exchange for funding new companies, as the former have more significant upside potential and some downward protection. Lenders are always concerned that funds can be distributed to shareholders instead of prepaying their debt.
