M&A

Question 1

What is mezzanine debt/quasi debt?

Answer 1

A hybrid method composed of both features from equity and debt - the lender of the debt can exercise an option to convert their interest into one in equity if the borrower defaults.

Question 2

What is a leveraged buyout (LBO)?

Answer 2

It involves the extensive borrowing of capital as well as both the acquirer’s and target company’s assets being put up as collateral

Question 3

What are the uses/advantages of mezzanine debt/quasi debt?

Answer 3

It is the most effective method of creating a capital structure that secures the most funding, offers the lowest cost of capital, and maximises return on equity.

Question 4

What are the advantages of an LBO?

Answer 4

It facilitates enormous acquisitions without the need for a large capital commitment

Question 5

What is a Vendor Take-Back Loan? (VTB)

Answer 5

Used where the acquirer may be experiencing difficulty in obtaining external investment to finance the acquisition, this can come in the form of a loan from the target company which the acquirer will pay back over time.

Question 6

What are the advantages of debt financing?

Answer 6

• Considered to be much cheaper than equity
• Tax advantages; interest payments tend to be tax deductible
• Can impact credit, however