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I never understand how this works with acquisitions. So they are only putting in £1bn, then raising the other £4bn by selling the assets that they just bought?
It's a kind of legal tax dodge on the part of the company doing the acquiring, because the interest on the debt they take on is offset against their corporation tax, reducing it. The banks support it because they can charge higher than usual interest rates (because the acquiring company likes the higher interest rates) and they feel safe about the loan because the acquired company is usually collateral for it So the buyer and the lenders win, while the customers and employees of the acquired company usually lose. To us ordinary humans, it looks like some jumped-up conman making his victims pay for his crimes. Which is often what it is, in effect.
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itsbruce
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I never understand how this works with acquisitions. So they are only putting in £1bn, then raising the other £4bn by selling the assets that they just bought?
Another example that springs to mind is when Glazer purchased Man United. Paid about £800million, but most of it was loans secured against the asset he was purchasing. So he put in very little money himself, and the club found itself with an extra ~£800m of debt as soon as the deal was done. Weird.