In traditional mergers and acquisitions leverage is often used to finance the purchase. Assuming the target company’s operations can handle the added expense post-closing of the additional debt, this can be a good option. One doesn’t need to look too far to find examples of Private Equity companies doing exactly this as they add new companies to their portfolios.
This is also often the case with operating companies purchasing other businesses. Even if it’s done as an all stock deal, the acquirer is still taking on the debt of the target company.
As we pointed out in a recently published article, New Interest Deduction Limitation | A Strategy to Mitigate Impact, the deductibility of interest expense, for tax purposes, is going to be limited going forward. The tax bill passed last year has what effectively amounts to a disincentive to using significant amounts.
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