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. . ◦ The Acquiring Company's Stock or ◦ A Combination of both. if not all.  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. of the target company's ownership stakes in order to assume control of the target firm.  Acquisitions are often paid in ◦ Cash.

 In cash deal. the roles of the two parties are clear-cut. it's less clear who is the buyer and who is the seller.Stock vs Cash  In a cash deal. but in a stock deal. roles of the two parties are clearcut. . its less clear who is the buyer and who is the seller. A really confident acquirer would expect to pay for the acquisition with cash.  If the acquirer believes the market is undervaluing its shares. but in a stock deal. 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. .

the value is fixed but the stock fluctuates.Fixed Share or Fixed Value If the acquirer believes the market is undervaluing its shares. . In fixed shares the number of shares are fixed but the value may fluctuate between the date of announcement and the closing date. it should not issue new shares to finance an acquisition. In fixed value.

 If a merger goes wrong it becomes extremely difficult and expensive to unwind the decisions.  Acquisitions require full payment upfront. .  Many Acquisitions fail because the benefits which they bring can easily be replicated by the competitors.Why is the Market Sceptical about Acquisitions  Many of the Acquisitions fail because they set a very high performance bar.  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 Company’s 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 company’s shares will drop before closing? .

 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?” . They have to compare the value of the company as an independent versus the price offered.Questions for the Seller  The task of the selling company is very simple.

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. . the stock-financed acquisition appear to favor selling shareholders as they are allowed to receive the acquirer’s stock tax-free. By Contrast.

are treated as the pooling-of-interest method. and meet a number of other requirements as specified in AS-14 Amalgamations and Mergers. In case of Cash Deals.Accounting Treatment of Acquisition Cash deals must be accounted for through the purchase-accounting method. Acquisition that are at least 90% paid for in shares. the price paid between the acquisition price and the fair value of the company is Goodwill. .

◦ For Selling Company .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.

Thank you… Kaushal Khatore .