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In relation to mergers and acquisitions, Franks et al. (1987) study the returns to the bidder...

In relation to mergers and acquisitions, Franks et al. (1987) study the returns to the bidder across different means of paying for the target company. How do the returns to the bidder offering cash differ from those of the bidder paying with equity? Can you offer a possible explanation?

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Returns to the bidder offering cash differ from those of bidder who are paying with equity because cash offering are those offering in which the acquiring firm buy the target company with cash where as in case of stock merger that acquiring company will be acquiring the stock rather than the cash to complete a Merger deal.

Returns to the bidder in case of offering equity share rather than cash is higher because that will be giving him a chance in order to acquire the company by issuance of the stock and that will also mean that the company will be having a potential of growth as the shareholders of the target company will be having a stake in the shareholding pattern of the acquiring company and that will mean that they can be remain invested into that company for a longer period of time and make a higher rate of return and gain through higher capital appreciation so, the stakeholder of target company can be the stakeholder of acquiring company for the longer period of time.

Cash merger and acquisitions are very traditional in nature but they are not having the potential to return a high amount of income because the company will have to suffer a cash outflow and that will be impacting the operation of the company in the short run and it will also mean that the liquidity of the company will be going lower in order to acquire the other company and they will also be having a stress on the books of account of company, So, issuance of equity is much more better than issuance of cash because issuance of cash is just like a buyout whereas issuance of equity is like merging two company for a longer period of time in order to get advantage to Synergy benefits but issuance of cash will be taking a hit on the company in the form of financial stress and loss of liquidity.

jeff jeffy answered 2 years ago
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