Page 204 - Microsoft Word - 00 P1 IW Prelims.docx

Chapter 12

Financing a cash offer

The amount of finance needed might be higher than expected if there is
a plan to repay the target entity debt at the time of the takeover. This
can sometimes be a requirement of the target entity's lenders, as
stipulated in a debt covenant.

Three main choices for raising the cash needed:

Existing cash Borrowings – from the Rights issue to
reserves – can only bank, or by issuing existing
be used if the bidder bonds shareholders
has a large cash
surplus. Advantage – low cost Advantage – gearing
of servicing the debt. is not affected,
although its earnings
Disadvantage – per share will fall as
increase in the bidding new shares are
company's gearing. issued.

Disadvantage – it is
the shareholders
themselves who have
to find the money to

invest.

192