Mayur_a25
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What does LEVERAGE means ........ in terms of M&A .
From India , Mumbai
Normally Leverage means introduction of DEBT into your capital structure.
For example, your comapny, named Reliance, wants to raise 100 rs for a new project, then it would have option to raise it from shares as well as from debt market. Suposse the return you are promising to give to share holders is 12% and the debt you can borrow at 10%.
As we allready know from compnaies point of view shars is the easiest way to raise the money and also the returns on it are based on the condition that you should make profit and then only you will pay. Where as in case of DEBT, its a fixed income bearing security. That means regaredless of your company making profit or not, you willl have to pay them.
Hence, every company goes for a type of mixing of bot of these option to raise hteir funds so as to maximize their gains and also to balace the risk involved. Hence, when from 100% funds to be raised if 70% are raised from share capital and remaining 30% from debt it would be called leverage. Also, when any company's balance seet shows more of DEBTS than share capital then it is called as leveraged balancesheet.

As far as the dictionary meaning is concerened, leverage means to influence or to act powerfully or effectively.

In case of M&A, one compnay tries to acquire other company and in this process it has to raise some capital for M&A purpose. So, as i said eariler if company is raising more of capital from debt then it would be called leverage.

I have tried to explain you in my words. Hope you will get benifited from this. Please reply your comments.

From India ,
Leverage is the use of credit or borrowed funds to increase one's investment capacity and increase the rate of return on a buyer's equity investment. Investing with borrowed funds amplifies potential gains while also increasing the risk of losses. Buyers analyze various capital structures of a transaction at a given price and evaluate the investment opportunity with respect to return on equity based on varying levels of leverage.
In an acquisition, adding leverage allows a buyer to use a smaller proportion of their own equity to fund the remaining consideration to be paid to the seller. The buyer can then afford to pay for the target company and still realize an adequate return on their invested capital. The higher the amount of leverage, the higher the potential return on equity.
The use of leverage, however, increases the assumed risk over and above the operating risk. Debt servicing costs resulting from higher debt levels can force a firm to default on its payment. The amount of leverage available to fund an acquisition depends on:
• Type of industry
• Competition scenario
• Firm's strategic positioning
• Growth opportunity
• Potential for margin improvement
• Tangible asset coverage
• Working capital requirement
• Ability to service the debt
• Ability of management
Although leverage entails risk, significant equity returns are possible without material growth.

From India,
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