The M&A boom has been much heralded in the financial press and the recent raft of deals has certainly kept lawyers in the City busy. But it is not just corporate lawyers that have had their hands full. Acquisition finance lawyers have played a pivotal role as companies seek funds to finance their purchases.
One of the driving forces behind this activity is the cost of borrowing. Companies looking to raise funds for a purchase can borrow relatively cheaply and just about every one of the M&A deals mentioned in the press will involve acquisition finance in one form or another. This is because most companies do not have the money in reserve to be able to fund their deals without some sort of debt instrument.
Acquisition finance can take many forms. It can be in the form of a straightforward loan, or a company may chose to issue a bond or a series of bonds in order to raise the funds. There are many deals where the company takes out a loan and then funds it via a bond issue. Bond issues allow companies to get a big injection of money very quickly, but pay it back over a longer period of time at a rate that is normally cheaper than that of a bank loan.
Last month, Telefonica announced an 18bn cash bid for UK mobile phone operator O2 (see corporate). It is the biggest cash offer ever to take place in the UK. It is a cash bid because it does not involve the exchange of shares as part of the offer.
Telefonica opted to fund the bid via a loan that will cover the complete cost of buying O2. The 18bn debt package is being underwritten by three of the major investment banks – Citigroup, Goldman Sachs and Royal Bank of Scotland. It is one of the largest loans ever.