The amount of debt that can finance an acquisition depends on the projected cash flow of the combined company. This will depend on the financial health of both the target and the acquirer. If a company is interested in a leveraged buyout, it may be able to finance all or most of the purchase price with debt. Under this structure, the debt is collateralized by the assets and cash flows of the company being acquired. This transaction is similar to a home mortgage, where the loan is backed by the underlying asset.
Senior debt is the cheapest and most common form of debt and is usually provided by banks.
There are many providers of senior debt that use different methodologies for structuring loans. Subordinated debt lenders are more aggressive in the amount of debt they provide. Accordingly, they charge higher interest rates and often require a piece of the equity of the combined company. While debt is cheaper than equity, the interest and amortization requirements, as well as possible financial covenants, can limit a company's flexibility. Large amounts of debt are more appropriate for mature companies with stable cash flows that will not require much capital for growth.