Question

Short question, please answer in detailed

State and explain three of the factors that affect the method of payment , i,e. stock versus cash, in a merger transaction.

Answer 1

A merger generally occurs when a large company wants to acquire a smaller company. There can be many reasons for the merger like the larger company wants to increase its market share by acquiring a smaller company. The payment in case of a merger can be in terms of cash or stock or a combination of cash and stock. Some of the main reasons that influence this decision of payment are:

1) Risk: The payment through cash involves less risk while the payment through stock is more risky.

2) Role clarity: The clarity of roles is more in cash payment while there is some confusion in case of stock payment.

3) Tax liability: The tax liability exists when the payment is done through cash and stock however tax liability is less when there is a combination of stock and cash used for payment.

4) Synergy future: A merger for which payment has been paid by cash will have a strong synergy while a merger where payment has been done by stock will have a weaker synergy.