Debt financing or Equity financing?

Debt and equity financing are two basic options for company to raise money for moving on business. Debt financing is a method raise money through long-term bank loans or borrowing money from financial institutions. Meanwhile, equity financing is raise it from investors like selling shares.

 

 
  
Dell the third biggest PC manufacturer announced to signed a mergers agreement with Michael Dell, the chairmen and CEO of Dell, in partnership with global technology investment firm Silver Lake, will acquire Dell.  

 

 

According the details from Dell:

   "A Special Committee was formed after Mr. Dell first approached Dell’s Board of Directors in August 2012 with an interest in taking the company private. Led by Lead Director Alex Mandl, the Special Committee retained independent financial and legal advisors J.P. Morgan and Debevoise & Plimpton LLP to advise the Special Committee with respect to its consideration of strategic alternatives, the acquisition proposal and the subsequent negotiation of the merger agreement."

 

"Dell shareholders will be offered $13.65 in cash for each share, a 25% premium to the share price when the deal rumours first surfaced. Dell will be values at $24.4 billion."

  

The advantages of debt financing, is less expensive to the firm than equity finance, not only because the costs of raising the funds are lower, but because the rate of return required to attract investors is less than for equity. Debt finance shows advantages of growing aggressive strategy because it can low the interest rate of the company. Besides that, when compare with equity financing, the company do not need to give up any of the ownership of shares or business controlling rights. However, the method would raise the interest which loan money from bank. This to some extent would influence the company raising their assets or equipments. Last but not the least, this strategy would impact the annual reports figures like cash flow and long-term borrowing.

When considering equity financing, the positive would be no debt payments which contribute a low debt-to-equity ratios in their annual reports. Whilst the shareholders are share the risky of the strategy of new investors. But, obviously, the interest should be share with new investors. Quite normally, that the company need to give up portion of ownership.

  

As far as i am concerned, without the regulation and limitation exposure of multinational enterprises, dell could be more will to transit into service company. Or it is advantages of the private company debt restructuring. More important it is good for the investors less worry about its business transition.