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Short question, please answer in detailed State and explain three of the factors that affect the...

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.

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Expert Solution

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.


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