When an acquirer wants to purchase a company or specific asset but doesn’t have enough cash or liquid assets to complete the transaction, acquisition loans are pursued. The collateral for this loan is target’s assets, so the loan has a reputation to be risky. The lender studies the acquisition and forecasts the post-deal cash flows of merged entity to make sure that the interest and principal payments are made in due time.
The acquisition loan can be issued one bank or a consortium of banks. Acquirers may issue bonds in open market to avail the loan from public and financial institutions. The acquisition loans are often expensive and availing them is complicated in case of large and complex deals. Share prices fall often after announcement of the acquisition with perceived high risk but prices may soar if investors see synergy in the deal and are confident that the debt will be repaid in time
Example: Tata motors acquired Corus group in 2007 for $12.1 billion, partly funding the deal through a $6.2 billion loan.