Stock or Cash?

The TradeOffs for Buyer and Sellers in

Merger and Acquisitions.

Kaushal Khatore

Acquisitions
A

corporate action in which a company buys

most, if not all, of the target company's
ownership stakes in order to assume control of
the target firm.
Acquisitions are often made as part of a
company's growth strategy whereby it is more
beneficial to take over an existing firm's
operations and niche compared to expanding on
its own.
Acquisitions are often paid in
Cash,
The Acquiring Company's Stock or
A Combination of both.

Stock vs Cash
In

a cash deal, the roles of the two parties are

clear-cut, but in a stock deal, its less clear who is
the buyer and who is the seller.

In

cash deal, roles of the two parties are clearcut, but in a stock deal, it's less clear who is the
buyer and who is the seller.

really confident acquirer would expect to pay

for the acquisition with cash.

If

the acquirer believes the market is

undervaluing its shares, it should not issue new
shares to finance an acquisition.

Risk
In

cash the risk stays with only the

acquirer.

In

stock deal the risk in distributed

between the buyer and the seller.

The

companies should never be beguiled

into thinking that issuing stock is risk-free.

Fixed Share or Fixed Value

If

the acquirer believes the market is

undervaluing its shares, it should not issue
new shares to finance an acquisition.
In fixed shares the number of shares are
fixed but the value may fluctuate between
the date of announcement and the closing
date.
In fixed value, the value is fixed but the
stock fluctuates.

Why is the Market Sceptical

about Acquisitions
Many

of the Acquisitions fail because they set a very

high performance bar.

Many

Acquisitions fail because the benefits which they

bring can easily be replicated by the competitors.

Acquisitions

require full payment upfront.

If

a merger goes wrong it becomes extremely difficult

and expensive to unwind the decisions.

The

calculation of the purchase price is driven by the

Comparable other acquisitions rather than the
calculations.

Questions for the Acquirer

Valuation

of acquirer's shares

Are the Acquiring Companys shares

undervalued, fairly valued or over valued?
Synergy

Risks

What is the risk that the expected synergies

needed to pay for the acquisition premium will
not materialize?
Pre-closing

Market Risk

How likely is it that the value of the acquiring

companys shares will drop before closing?

Questions for the Seller

The

task of the selling company is very simple.

They have to compare the value of the company
as an independent versus the price offered.

The

Questions are:

How

much is the acquirer worth?

How

likely is it that the expected synergies will

be realized?

How

great is the pre-closing market risks?

Tax Consequences of
Acquisition
Cash

purchase of shares is the most taxfavorable way for acquirer as depreciation

but in the shareholders of the selling
company will face a tax bill for capital
gains.

By

Contrast, the stock-financed acquisition

appear to favor selling shareholders as
they are allowed to receive the acquirers
stock tax-free.

Accounting Treatment of
Acquisition
Cash

deals must be accounted for through

the purchase-accounting method.

In

case of Cash Deals, the price paid between

the acquisition price and the fair value of the
company is Goodwill.

Acquisition

that are at least 90% paid for in

shares, and meet a number of other
requirements as specified in AS-14
Amalgamations and Mergers, are treated
as the pooling-of-interest method.

Shareholder Value At Risk

(SVAR)
It

is the premium paid for the acquisition

divided by the market value of the acquiring
company before the announcement is made.
OR
Premium Percentage x Relative Market Value
of Seller to the Buyer
For Acquirer

The

premium at risk calculation shows the

attractiveness of a fixed value offer relative to
fixed share offer.
For Selling Company

Thank you

Kaushal Khatore