Cash Flow and Acquisition

Executive Report on Financing the Acquisition Financing of an acquisition is one of the challenging aspects when it comes to a company with some few assets unlike the one to be acquired. Paying in cash would not be a viable option putting into consideration the lack of capital involving JC Penney. Its market valuation is only one-third of the value of Kohl, which stands at $6.9 billion. Therefore, the use of shares is inappropriate because enough capital to pay for the acquisition cannot be obtained.

Financing the acquisition requires significant cooperation between all the partners in the deal because JC Penney does not have the resources needed to complete the acquisition immediately. Some risks are also involved as all the equity belonging to JC Penney will have to go into the deal. In this case, the cash flow belonging to JC Penney would be used as the collateral in the acquisition of any debt that will be incurred because of the acquisition.

It is evident from the analysis that the companies have almost equal debts incurred from their previous operations. Such an aspect must be considered before the acquisition process is designed, so that method used in financing the acquisition is finalized. This will influence JC Penney's strategies in getting sufficient capital to carry on with the acquisition. For example, the payment of dividends should be held for the company to attain enough capital to carry on the acquisition.

Since JC Penney is doing well than the other competitors, it has a chance of increasing its cash flow in the next financial year. The success of such strategies enables the company to settle the debts associated with the acquisition with ease and within the agreed dates (Fischer, 2017). Various options are available for the financing of the acquisition chief among them being bank financing. The bank financing is viable in case the target company is one that has many assets and a positive cash flow and a strong profit margin.

This is the case of Kohl as the target company has more assets, unlike the acquiring company. With the positive cash flow, it makes it easier for JC Penney to find bank financing. However, research shows that there is a decline in cash-flow-based loans. Various reasons may hinder JC Penney from getting this kind of funding. They include the quality of the cash flow, the debt load of both companies, and the issue of insufficient collateral.

For the management to access this type of funding, enough collateral will have to be raised as the lender's decisions depend on it. The positive cash flow that JC Penney and the prospective increase in sales after vacation provide the necessary confidence that is enough to allow the company to access bank funding (Elsas, Flannery, & Garfinkel, 2014). The other source of option for funding that can be used by the organization is the seller financing. The seller can finance a part of the transaction.

It can be done in a way that the two companies can do it without constraints like the buyer making a down payment. This is solely based on the agreements made from JC Penney's perspective. The stakeholders of the Kohl Company have to make a decision in regards to the down payment they will want JC Penney to pay before they can finance the rest. After the acquisition, JC Penney will pay the rest of the funds within the agreed time.

The business itself and the assets that accompany the deal provide the necessary collateral during the acquisition. The interest rates, the length of time that the acquiring company should take to pay and the principal payments to be made depend on the agreement reached between the two companies (Bates, Neyland & Wang, 2016). However, the company should ensure that it approaches multiple sources of financing before the final plan has been made.

For example, the organization should create a strong working relationship with a lead bank that understands the ways of the business may provide a good platform for getting the right information and for funding. Both parties should also evaluate the deal structures that tend to minimize the financing requirements. For example, the preservation of the legacy debt may reduce the challenges that the organization may face in getting funds for the process.

The organization also needs to consider the level of financing as a fundamental part of the overall deal negotiations because the credit markets are competitive. For this reason, the organization should consider all the options available especially those touching on the source of funds.