Mergers and acquisitions (M&As) are a standard type of transaction in the business world — so common, in fact, that 2021 was a record-breaking year in the M&A space. Because of the nature of the business world, a place where companies are formed, grow, fail, merge or acquire one another, it’s safe to say that your company or a company you’re involved in or have a relationship with will be involved in some sort of M&A activity sooner rather than later.


About M&As

Mergers and acquisitions are extremely common transactions in which two companies — a buyer (the acquiring company) and a seller (the target company) — combine assets. Of course, there are multiple types of M&As, such as horizontal mergers and acquisitions (one company buys out a competitor), vertical mergers and acquisitions (two companies in a similar industry but occupying different spots in the supply chain combine) and conglomerate mergers and acquisitions (where two companies in different industries combine), among other types. And there is M&A in finance as well.


What Is M&A in Finance?

M&A financing is the process a company goes through to raise the money required to fund mergers and acquisitions. In some instances of finance M&As, the acquiring company (the buyer) issues shares in order to fund the M&A; in others, it will use its cash reserves or borrow the money in order to proceed with the deal. This leads us to the two types of financing in this type of M&A: equity financing and debt financing.


  • Equity financing: In this scenario, a company sells equity in the company to gain the capital to fund the transaction. This is an excellent option for a company that lacks a large cash reserve. In some cases, it involves a stock swap (using shares in lieu of cash) to acquire shares in the target company.
  • Debt financing: This is borrowing money to fund the deal. Typically, it’s far more difficult for newer companies and startups to use this method. The amount of money that can be borrowed usually depends on an EBITDA multiple. For example, a debt/EBITDA of 5x would indicate that a company could swing five times its EBITDA in borrowing. However, as referenced in the cons below, debt financing can negatively affect the company’s credit ratings.


Note that M&A transactions can be either equity financing, debt financing or a combination of the two.


The Pros and Cons of Equity and Debt Financing

Needless to say, there are pros and cons of both types of financing models. They are the following.

Equity financing pros:


  • Doesn’t increase leverage
  • Works best when a company’s share valuation is high
  • Doesn’t need to be repaid


Equity financing cons:

  • More costly than debt financing
  • May lead to loss of control over the company
  • Can increase net income but may result in lower EPS, in the event management issues additional shares


Debt financing pros:

  • Generally less expensive than equity financing
  • Doesn’t allow ownership to lose control
  • Benefits all the shareholders


Debt financing cons:

  • Amount of financing is limited
  • Interest must be paid on debt
  • Credit rating may be downgraded


How to Utilize Due Diligence in M&A Financing

Performing due diligence is a vital step in any type of M&A transaction. Due diligence is a deep dive into the details and particulars of any type of business deal, used to analyze and mitigate risk. It gives a full look under the hood of the target company, and the endgame is that it should leave no questions unanswered. The findings on the target should include the following:


  • Overview and corporate matters
  • Financials
  • Technology/patents/IP
  • Strategic fit
  • Target base
  • Management and workforce
  • Legal and environmental issues


Virtual Data Room for Finance M&A

One of the mandatory tools in an M&A of any sort is the use of a virtual data room (VDR). A VDR is a secure online document storage location that offers the security and convenience to allow companies in all phases of a merger or acquisition to communicate. It allows all parties involved to store and share the required documentation for a financial M&A safely and securely.


A VDR provides cost savings and speed to any transaction by allowing the sharing and editing of documents quickly and securely. It delivers a secure online vault for storing and sharing documents, and its access controls provide access privileges for the legal, financial and other parties involved in the transaction. It also allows all parties to expedite the process, saving both time and money.

CapLinked, an industry leader in the VDR space, delivers secure VDRs for M&As of all types. CapLinked’s VDRs provide secure access, enterprise-level encryption, multiple layers of security and version control. To see how CapLinked can help streamline your M&A, sign up for a free trial.


Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.



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