Why use leverage to acquire a company?

you mean why use "debt"?

When financing an acquisition, let's look at our "Sources of Capital" from the Borrower / Company's perspective (leveraged)

1) Term Loan A (TLA) - cheapest - bank lenders - up to 4.0x leverage - L+150-200 4.0x lev -cheapest L+150 for BB/Ba2 vs. L+175 for TLB, L+200ish for B+/B1 vs. TLB L+300-375+ -bank lenders (relationship driven) (banks not comfortable lending above 3.0x / 4.0x [senior / total] due to Regulation - Leveraged Lending Guidance -https://www.paulhastings.com/publications-items/details?id=75c9e269-233…; https://www.federalreserve.gov/supervisionreg/srletters/sr1303a1.pdf) -other considerations: only 5yr tenor, comply w/ financial covenants such as total leverage ratio, less flexibility, higher amortization of principal (5% per annum)

**2) Term Loan B (TLB) - more expensive - BB/Ba2: L+175-200 (+25 bps vs. TLA); B/B2: ~L+400 ** institutional lenders -more lev -4.5x - 5.0x leverage, until you need to dump the rest in 2L TLB -need a rating - that costs $ and time (Rating Agency Presentation too) -B/B2 to B-/B3 typically L+400 give or take -institutional lenders (return-driven) -other considerations: 7yr tenor, cov-lite (no financial covenants, typically) - more flexibility, 1% amort of principal

**3) 2nd Lien Term Loan B (2L TLB) or Unsecured Notes - 2L TLB: +400 bps to 1L TLB at ~L+800 ** 4.5x/6.0x to 5.0x/7.0x (1st Lien / total) - more leverage -Company perspective - maximize 1L TLB at L+400, then the rest in 2L TLB at L+800ish -B/B2 to B-/B3 typically --institutional lenders (return-driven), but less # of lenders do 2nd Lien debt (riskier) -other considerations: 8yr tenor, cov-lite (no financial covenants, typically) - more flexibility, no amort

4) "Strategic Alternatives" - Direct Lending, Mezz, Equity Issuance - then, if all else fails, such as seeking a Direct Lending deal at higher pricing, or equity issuance, which will dilute existing equity holders

Example - look at Capital Structure and see as you look down the rows, the pricing increases Revolver & TLA L+150 TLB L+175 Unsecured Notes 4.375%

Worldpay - Capital Structure

Few points not really touched on above but even more important then the marginal reduction in cost of capital:

1) Your risk is substantially lower. If an investment goes wrong, your exposure is capped at the lower equity check and lenders will eat more of the loss.

2) A smaller equity check also allows you to diversify your portfolio better, i.e in a 1bn fund you don't want 20% of your portfolio stuck in one name

3) Upside potential is magnified, $1mm of upside from your bid case boosts your IRR alot more when your equity check is 50mm vs 100mm as lenders return are fixed so they don't share in any upside

On increasing leverage via debt financing to acquire a company: the question is - why not? Your goal is to get the cheapest pricing / source of funding as part of the capital structure. If the Company has the capacity to repay it's principal and interest payments and shows the ability to de-lever to a sustainable, optimal level over time, it makes sense to increase leverage w/ the intent to de-lever.

See Interagency Guidance on Leveraged Lending https://www.federalreserve.gov/supervisionreg/srletters/sr1303a1.pdf

"A borrower's capacity to repay and ability to de-lever to a sustainable level over a reasonable period. As a general guide, institutions also should consider whether base case cash flow projections show the ability to fully amortize senior secured debt or repay a significant portion of total debt over the medium term."

"The risk rating of leveraged loans involves the use of realistic repayment assumptions to determine a borrower's ability to de-lever to a sustainable level within a reasonable period of time. For example, supervisors commonly assume that the ability to fully amortize senior secured debt or the ability to repay at least 50 percent of total debt over a five-to-seven year period provides evidence of adequate repayment capacity. "