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On the M & A debt financing risk and its prevention

Author: ChenYan From: www.yourpaper.net Posted: 2010-06-03 15:16:56 Read:
Abstract: on the basis of analysis of mergers and acquisitions debt financing risk from enterprises and governments to respond to risk prevention and control measures.
Paper Keywords: mergers and acquisitions; risk; prevent

Mergers and acquisitions, corporate mergers and acquisitions, mergers and acquisitions among enterprises is an enterprise legal equality, voluntariness, compensation for equal value on the basis of the behavior of other legal property rights to certain economic enterprise capital operation and operation of a major form. Since the 2008 financial crisis, the wave of mergers and acquisitions around the world inevitably affect China's enterprises. However, due to the short history of mergers and acquisitions in China, a problem prevalent in mergers and acquisitions in China that lack of knowledge of M & A risk, especially financial risk. Mergers and acquisitions of financial risk in the debt capital based financing structure, when after the merger not achieve the desired effect, may produce the risk of interest payments and scheduled principal risk.
Debt financing motive
Debt financing costs are generally lower than equity financing and debt financing will not dilute existing equity, can also increase the potential for the development of enterprises, increasing the rate of net income per share; But there is a fatal flaw, that risk too large. Although funds through debt financing can not lose control of the business, but the maturity of debt financing must be debt service. Once a company can not be due and payable. The enterprises can occur to the debt crisis. Are even forced bankruptcy. And equity financing just to avoid this shortcoming, the equity financing is not repayable, but will dilute existing shares, will lose control of the business, and higher financing costs. From the perspective of investors, the two financing commissioned agent monitoring costs. Contract of debt is lower than equity contract monitoring costs. Meter from a financing point of view, the issue of the cost of bond financing is low, because the bond interest to be included in the cost of the tax deduction, so it is recognized as a reduction of taxes, can bring tax shield income. Equity financing, to the shareholders' personal capital gains and dividend income and corporate legal double taxation. In addition, debt financing will enable the company to greater use of external funding to expand the size of the company, to increase the company's profits for shareholders. Debt management means to obtain financial leverage effect. In equity financing through the capital increase means allows the company to increase capital, but also increased the dividend distribution base, diluted earnings per share, to affect the interests of the shareholders of the original, and the company management structure changes, and debt financing does not have this problem.
The main form of debt financing and its financial risk
Refers to the acquisition of corporate debt financing by borrowing to raise the funds required for acquisitions. That approach, including loans to banks and other financial institutions, private finance and the public issue of bonds.
(1) bank loans. This is the most traditional M & A financing. The advantage is that the procedure is simple, low-cost financing, financing a huge amount. The disadvantage is that to the bank must open their own business and due to bank on the operation and management. In addition, to get loans are generally required to provide collateral or guarantor. This reduces the ability to refinance. This risk is the use of bank loans financing. Change due to interest rates, exchange rates and the financing conditions of the enterprise possibility of loss. Including principally interest rate risk, currency risk, these risks with a certain objectivity. Enterprises and banks signed a long-term loan contract, the use of fixed-rate interest. The near bank loans lower interest rates, thereby suffered by businesses to pay more interest risk.
(2) private financing. This financing method is simple, and rarely operate in the control of creditors. The biggest risk of this mode of financing the cost of capital than banks, and most are short-term loans, enterprises are facing the pressure of debt service increased, especially in the company met the bad gossip, prone to a run, As for the business capital chain is broken, like the instant demise of the investment group in Xinjiang Delong.
(3) the issuance of bonds. The biggest advantage of this way of bond interest charged to the business before paying income tax, reducing the corporate tax burden. In addition, the issuance of bonds to avoid dilution of equity. The disadvantage is that the bond issue too much, it will affect the capital structure, reducing the credibility of enterprises, increasing the cost of refinancing. This risk refers to the enterprises in the use of bonds to raise funds, poor business results due to the timing of the bond issue, the issue price, coupon rate, repayment methods and other factors to consider possibility of loss. Including the issue of risk, inflation risk, the conversion of convertible bonds risk. Bank loans and the issuance of corporate bonds are corporate the main debt financing, and these two methods have debt-servicing obligations, fixed, determines the size of the financing risk they pose to fully rely on debt service capacity and profitability. So the relative financing risks, financing risks of the modern enterprise.
(4) auction, sale and leaseback transactions. Auction, sale-leaseback order to integrate into the funds required for mergers and acquisitions, the ownership of the first acquisition targets turn sold to leasing companies annually to the leasing companies to pay a rent in the form of the right to use of acquisition targets. After the expiration of the lease. Mergers and acquisitions ownership of an object into the capital of the enterprise acquired a symbolic price. By this way. Enterprises can solve the problem of insufficient funds in the acquisition process; continue to complete the whole process of mergers and acquisitions by the form of "rent", thus killing two birds with one stone. However, for large-scale M & A activity, requires a lot of cash flow, in this way in the mergers and acquisitions rarely played role. So the risk can be used as reference data. But no matter what specific form. Their essence is the same, that is, through the form of debt or debt in disguise to integrate into the funds required for acquisitions. As long as the enterprises to obtain the debt means that the risk to the enterprise, especially financial risk. Acquisition finance financial risk prevention
Debt financing fast speed, low-cost financing, enterprises can enjoy the many advantages of financial leverage, but we can not ignore its own fatal deficiency. For enterprises into debt, debt funds are at greater risk than equity funds. As long as the enterprises to obtain debt funding, will be faced with the pressure of scheduled debt. If the companies can not repay the principal and interest of the debt, the financial risk of the enterprise will evolve into a financial crisis. The company's debt is more. The greater the likelihood of financial crises. The slightest mistake, companies may go bankrupt. Businesses can not expand the size of the debt unlimited. In addition, with the constant expansion of the corporate debt, increased risk, creditors will demand a higher risk premium. As a direct result will lead to the rise of the enterprises have to bear the cost of financing. Offset rising costs, will naturally be part of the role of financial leverage. When corporate debt reaches a certain size, the cost of debt is exactly equal to the level of the level of profitability, the company's financial leverage is completely lost, and then increase the size of the debt. Enterprises will be subjected to the loss of financial leverage. At a time when the capital structure reaches an optimal capital structure.
The leveraged buyout is the use of debt financing financing for mergers and acquisitions, which may enable enterprises to a higher risk of insolvency and shareholders' equity change risks. Debt financing due to financial risk control within the level of security. The acquisition of the key issues in the decision-making. The following will specifically addressed the optimal control of the financial risk of the leveraged buyout.
Companies can set up a group of determination of the size of the risk indicators, the size of the standard as a controlled company debt, the company of insolvency risk control in a safe range. Determination of such risk control indicators have:
(1) Interest on debt repayment ratio = income before income / interest on the debt
The indicators show that the company's ability to repay its debt interest, according to the experience of the indicators should generally be greater than 1 and less than 2.
(2) debt principal and interest repayment ratio = debt principal and interest payments EBIT
Of which: debt principal and interest payments = amount of debt interest payment income tax rate debt principal payments?
The ability of the enterprise to repay the principal and interest can be measured using the indicators to ensure that enterprises will not be the loss of the ability to repay the crisis, in general, the indicators should be greater than 1.
(3) The maximum cash repayment ratio = debt principal and interest payments to get the maximum cash flow
Wherein: Get Cash flow is expected within 1 year after the acquisition of the target company's cash balance depreciation and amortization available can be used as collateral or sold EBIT non-competent business assets and other business market price.
This indicator reflects the enterprises in a relatively short period of time (usually 1 year) after the merger is completed, the enterprise has the greatest ability to repay the debt principal and interest to be repaid. The average value of this indicator as the "security boundary line", the index crossed the "security boundary line", then the corporate insolvency crisis.
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