What is one key advantage of using debt financing in a merger?

Using debt financing in a merger can have the key advantage of avoiding EPS dilution, which is when the earnings per share of a company are reduced due to an increase in the number of shares outstanding. When a company uses debt rather than equity to finance a merger, it does not issue new shares, thereby maintaining the current number of shares in circulation. This means that the earnings generated from the merger are distributed among the existing number of shares rather than a larger base, which helps preserve or potentially enhance EPS.

In many cases, if the merger is accretive, the resultant operating income can lead to an increase in EPS, as the earnings attributable to each share would still be significant while avoiding the dilution that new equity financing would bring about. This makes debt financing attractive for companies looking to enhance shareholder value without impacting the current ownership structure.

Additionally, using debt financing often allows companies to take advantage of tax benefits related to interest expense deductions, making it a favorable option in the context of mergers and acquisitions.