Capital Structure Changes in M&a Deals

Highlights

• Between the M & A process and capital structure there is a relationship which is reflected in the concept of financial restructuring

• Financial restructuring is directly aimed at optimizing the capital structure to minimize the cost of servicing the debt capital

• Any mergers and acquisitions lead to a change in the capital structure, not only on the level of debt and equity, but also to owners of capital level when changes ownership structure

Change in the structure of capital - as a tactic of M&A activity

From the point of view of financial management, the structure of capital with M & A can act as three aspects: as a cause, as a goal and as a method of protection against hostile takeovers

The objectives of financial restructuring, which are achieved within the framework of M & A:

• Optimization of the capital structure

• Reduction in the financial and business risks

• Improving financial stability

•  Achieving financial synergy

Optimization of the capital structure

The optimal capital structure - shows how much a firm should borrow in the form of debt capital, as well as equity in the form of preference and ordinary shares, in order to maximize the market value of the company

The question of which structure of capital is optimal and whether it affects the value of the company - a discussion issue, is evidenced by the existence of many theories of the structure of capital:

• The compromising theory of capital structure (trade-off theory)

• Modigliani and Miller theory (MM theory)

• Traditional theory

• Agency theory

• etc.

Financial Synergy

• Reducing operational risk (shown in vertical and conglomerate mergers)

• Financial risk reduction (reducing the cost of raising equity and debt)

• Tax effects (“tax shield”)

СApital structure as a method of protection against hostile takeovers:

• Followers of this theory believe that for each corporation in a market economy the statement is true: the higher the “debt/equity ratio”, the higher the probability of hostile takeover

• This follows from the fact that in order to gain control over the company, an individual needs to attract enough financial resources to buy a controlling stake, which is easier when the corporation has a significant financial leverage