Who is most likely to make an all-cash offer in M&A?

which type of acquirer is most likely to make an all-cash bid for a publicly traded target? 

a) Financial Buyer 

b) Publicly traded strategic acquirers

c) Other private acquirers 

Got this question on a Moodle Quiz from my professor and says answer b) is correct, but I don't understand how is it possible if PE funds never use their equity. Reason could be that strategics don't want to dilute their ownership but it still does not make sense to me. 

Comments (19)

  • Analyst 2 in IB-M&A

You're thought process is correct. This strikes me as one of those ludicrous academic questions where you have to read between the lines to what you're really being asked, which is who is most likely to make the most competitive bid for a company, which would be a strategic buyer for synergistic reasons.

If that's not what is being asked, then this question is dumber than it even reads.

Wouldn't think too much into it.

  • Analyst 1 in IB - Gen

If you want to add something or correct anything feel free to do so for the benefit of the thread. Re-reading what I wrote the sentence "Other private buyers are less concerned with EPS (it's largely a public-market metric) so they'd be more likely to use debt" doesn't make sense. I think I meant to say they could issue shares but then next sentence providing a counter-point. 

Let me know where I went wrong :)

MnAmistmaker212, what's your opinion? Comment below:

All-cash offers can be financed by balance sheet or debt. Neither Sponsor nor private company can issue shares to public shareholders so definitionally they have to be all-cash offers on a public takeout 

  • Analyst 1 in IB - Gen

I see what you're saying - it's just a question of semantics. When I said all-cash offer I mean cash on the balance sheet. So I'm counting debt as separate than all-cash even though of course you raise the debt to get cash to then make the all-cash offer. I guess in that sense the question can be quite vague. I was thinking more how are they financing the all-cash offer. Technically everything can be an all-cash offer since you could just issue shares to get cash and then use that cash to acquire (distinct from a share-exchange acquisition where the target gets acquirer shares as payment) 

Sponsors (through their portcos) and private companies can still "issue" shares right? They're just not going to be to public shareholders and not traded on an exchange. They could also pay for the acquisition with existing shares, without issuing new shares, by giving the target shares in their company as payment. 

  • 2
  • VP in IB-M&A

When a sponsor raises debt to fund a deal, do you picture them dragging a sack of seashells to the seller and dumping them at their feet or something?

A deal can either be a cash or stock deal based on *what the seller receives*. This has enormous economic, legal and regulatory implications. Whether you borrow, beg, or steal the cash you use is less important.

  • Analyst 1 in IB - Gen

Sounds good bro. I was coming at it from a financing perspective not from the seller receiving perspective. I see now the latter is the correct way to approach it. 

  • 2
Goldman's Ballsack, what's your opinion? Comment below:

i think the logic is that financial sponsors would use debt to boost returns, and other private acquirers would not be big enough to use all cash for a publicly traded company which is generally bigger than itself (reverse merger), but it's cheaper to pay w cash rather than debt or equity, and a strategic would have the cash to do it. That's just how i thought of it tho. guy above also makes a great point about credit ratings and extra debt lowering share price bc market pricing in leverage risk

Most Helpful
pipole4, what's your opinion? Comment below:

Ok, let's break this uo.

First, you need to distinguish sources & uses of funds in the deal. There is some confusion on this topic.

All cash offer means that the deal consideration is cash only. Technically that can be funded 3 ways:

  • acquirer uses available cash at hand
  • acquirer uses new debt
  • acquirer uses equity it raises in cash from its own investors

The mix of 1) and 2) depends on cash at hand, funding requirements for the business, etc. But they're essentially the same (i.e. you may use cash at hand to fund the deal but have to refinance existing debt in 6 months instead of using the cash to simply repay it)

Let's ignore 3) for a minute.

The other option for an acquirer is to pay for some or all of the consideration by issuing equity to the target. There are various reasons to do that:

  • sharing value of future synergies (since the sellers own a stake in the continuing business you can argue that the premium doesn't need to be too high)
  • preserve its financial structure and flexibility: rating, ability to tap financing sources, etc
  • optimize cost of capital

I would rank the three buckets as follows:

  • mostly likely to do all cash deal: private equity. Portcos are all about maximizing return on equity invested. Issuing mote equity in a portfolio company dilutes returns on the initial deal in most cases. And for a first deal (P2P) the entire point is to take the company private! pE could issue shares in their portfolio company, and I've seen it done, but that's 99% only when acquiring a private co owned by a family or another fund.
  • second most likely: private company. Easier to accept dilution, but if private issuing shares is not easy, for example won't work for acquiring a public co.
  • least likely to do all cash deal: public cos. That's one of the main benefits of being public: having an acquisition currency! Also tolerance for leverage is lower so more likely to use equity

It's all relative, and will depend on individual merits of a given deal. But that's how I would look at it.

NSB2017, what's your opinion? Comment below:

The word "cash" in the context of consideration in M&A can be deceiving because it includes both cash from the balance sheet but also any debt funding. 

With (a), sponsors always contribute some equity though they obviously will lever the company as much as they can (i.e., try to put as little of their equity on the table). Publicly traded companies, however, will generally try to avoid issuing equity because existing shareholders generally don't love the idea of their ownership stake in the company being diluted. So, public strategics generally prefer the cash / debt mix ("cash") but this can be affected by a few more nuanced things, such as how management / the Board view the value of their stock at a given point in time, among other things. 

e56869, what's your opinion? Comment below:

The word "cash" in the context of consideration in M&A can be deceiving because it includes both cash from the balance sheet but also any debt funding. 

Second this, folks who haven't had much reps on M&A transactions may interpret an all cash offer as the buyer paying the total consideration with cash from its balance sheet.

For example, my hopefully soon-to-sign deal will be an all cash offer where the buyer is 100% backed by credit facility and and it's still "cash" to the sellers.    

  • Analyst 2 in IB-M&A

Labore molestiae et fuga est. Ea ratione repellendus sed molestias voluptate quae atque.

Voluptate enim minima ratione alias. Vitae placeat dolorem nesciunt natus magni.

Iste ut qui error enim et molestiae. Aspernatur et atque exercitationem aut.

Start Discussion

Career Advancement Opportunities

March 2023 Investment Banking

  • Lazard Freres (+ +) 99.5%
  • Lincoln International (= =) 99.1%
  • Jefferies & Company (▽02) 98.6%
  • Financial Technology Partners (▽01) 98.2%
  • William Blair (▲11) 97.7%

Overall Employee Satisfaction

March 2023 Investment Banking

  • William Blair (▲05) 99.5%
  • Lincoln International (▲11) 99.1%
  • Canaccord Genuity (▲17) 98.6%
  • Stephens Inc (▲10) 98.1%
  • Financial Technology Partners (▲04) 97.7%

Professional Growth Opportunities

March 2023 Investment Banking

  • Financial Technology Partners (▲05) 99.5%
  • Lincoln International (▲01) 99.1%
  • Lazard Freres (▲14) 98.6%
  • Jefferies & Company (▽03) 98.2%
  • William Blair (▲03) 97.7%

Total Avg Compensation

March 2023 Investment Banking

  • Director/MD (6) $592
  • Vice President (27) $425
  • Associates (141) $260
  • 3rd+ Year Analyst (9) $194
  • 2nd Year Analyst (86) $170
  • 1st Year Analyst (266) $170
  • Intern/Summer Associate (45) $165
  • Intern/Summer Analyst (195) $92