The Pros And Cons Of Wells Fargo Acquisition Of Wachovia
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Introduction
Mergers that are conducted after thorough due diligence and with the correct timing can be successful in generating growth more quickly than organically. The Wells Fargo acquisition of Wachovia during the economic crisis of 2008 was an example of a merger that resulted in growth Wells Fargo could not have experienced as quickly through organic growth. Wells Fargo before the merge was known mostly on the west coast of the United States but only six years after the merger they experienced growth in deposits of 32%, more than 6,200 retail branches coast-to-coast and more than 264,000 employees (Raice, 2014). The capital structure of the merger was $15.1 billion all stock (DealBook, 2008). Not all mergers and acquisitions are successful…show more content… Kearney study reported negative returns to shareholders (Heffernan, 2012). Some mergers are pursued to eliminate competitive threats and others are great ideas on paper but end as huge failures. Stocks only, debt only, or a ratio of debt-to-equity can be used to fund mergers and acquisitions. Most mergers and acquisitions are funded by a combination of debt and equity. The purpose of this essay is to examine the advantages and disadvantages of using debt or equity to finance mergers and…show more content… One way to finance the merger is for the acquiring firm to obtain debt. Merger financing by debt refers to a company raising money through a loan defined with a payback period and secured with collateral (Coplan, 2009). One of the main advantages to using debt to finance a merge is that the lender has no claim to ownership of the new firm (Findlaw, 2014). Another important advantage to using debt is that the lender is entitled to repayment of the loan plus interest but cannot benefit from profits through share gains and dividends (Findlaw, 2014). Forecasting and planning are easier because principal loan payments and interest are known amounts and in addition the interest on the loan is tax deductible, which will reduce the overall cost of the loan (Findlaw, 2014). Debt capital does not require compliance with state and federal laws and regulations, in addition approval from shareholders for certain actions is not required (Findlaw, 2014).
There are many advantages to raising capital through debt but there are also risks and disadvantages. The main disadvantage of debt over equity is that it must be repaid plus interest. When debts are not repaid, the company’s property and assets can be repossessed by the financial organization (Kokemuller, 2015). The basis of debt financing is against future earnings and allocation of profits need to be allocated to pay the debt, which limits cash flow