Question

What is the most prominent theory to explain the differential returns between cash and stock offers in an acquisition?

Answer 1

There is no one prominent theory which can explain cash & stock options asit vary from case to case. However, followings are the points explaining in which casee which option is beneficial to the acquirer -

1. When acquirer has a cash shortage, one would prefer to pay it in stocks.

2. To avoid taking the debt (usually when acquirer has to pay through cash, one tends to take debt to avoid a big hit in the cash book)

3. When the Aquirer feels its stock is over valued & it's to go down in the next correction, the one would certaily opt for stock option.

4. When the seller wishes to avoid cash because of tax converns. When the seller receives cash, immediately becomes taxable in the hands of the seller.

5. Strategic v Financial buyer. If an acquirer has a strategic intentions then one would usually opt for stock over cash & vice versa

6. Ownership dilution. When an acquirer is okay with diluting the ownership, one would opt for stock option.

7. Synergy. when an Acquirer feels that it sunergy arises out of the involvement of the buyer then it's opt for stock option.

Nowadays, companies tend to opt for the hybrid version i,e an ideal mix of stock & cash