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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...
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…
References
Bates, T. W., Neyland, J. B., & Wang, Y. (2016). Financing Acquisitions with Earnouts.
Elsas, R., Flannery, M. J., & Garfinkel, J. A. (2014). Financing major investments: information about capital structure decisions. Review of Finance, 18(4), 1341-1386.
Fischer, M. (2017). The source of financing for mergers and acquisitions. The Quarterly Review of Economics and Finance.
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