Takeover - Cash vs. Equity
Are the majority of takeovers these days completed through offering shareholders stakes of the acquiring company's stock, rather than paying out cash for each share?
Also, some pros/cons of each I can think of off the top of my head as I think about this. Any insight would be greatly appreciated, as I'm rather ill informed about the subject.
-Cash is generally viewed as stronger, going back to the "cash is king" concept. It gives people their money ASAP (time value of money) and allows investors to reallocate their capital as they please. Additionally, this takes out liquidity concerns for the new shares.
-Equity would allow shareholders to get a stake of the stock before it can benefit from synergies, economies of scale, etc., which would hopefully drive up its price. However, most mergers/takeovers fail, making cash superior once again.
I would focus less on what the advantages and disadvantages of receiving stock vs. cash from the target shareholders' perspectives, and instead study reasons why the acquiring company would use cash/stock to pay for the transaction. There are a few main factors:
The answer is that it depends. Most smaller acquisitions are financed through cash. When you're getting to a higher valuation for your target company, you may have to use equity or raise additional cash through debt to generate adequate financing for the transaction.
Thanks. Much appreciated.
In general, cash deals are much easier to get done because, well, cash is cash. When you get to a huge valuation, like MSFT/YHOO, it's hard for anyone to pay $45B in cash, so stock can become necessary.
Private equity deals of course are always financed via cash as their stock would be worthless or worth much less than the company they're acquiring in the case of PE firms that are public.
Lately, some strategic deals that were cash deals financed via on-balance-sheet cash and new debt taken out have shifted to cash/stock deals because of the credit markets. This of course also lowers their chances of succeeding, as it can be very difficult to get a target to like the idea of stock unless it's Berkshire Hathaway or Google.
In general, stock is not used unless it has to be due to the size of the transaction or lack of financial resources.
All the points raised above are valid, but i think one of the most important points which you need to mention is that (from the acquiror's perspective) cash vs. stock will make a difference to your accretive/dilutive analysis.
Less of an effect on the acquirers' EPS, if done completed through cash I am assuming.
Good thing you posted this. I need to do some further reading on accretive vs. dilutive.
Not necessarily true. Depends on the interest costs in a cash deal. If interest costs are very high, then cash deal could be more dilutive.
Pro forma EPS (cash deal financed through debt) = Net income (A) + Net income (T) - after-tax interest cost - after tax depreciation step up / No. of Shares (A)
Pro forma EPS (stock deal) = Net income (A) + Net income (T) - after tax depreciation step up / pro forma number of shares
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