Deal Structuring In M&A

Deal Structuring In M&A

Which form of payment is better in an #mergersandacquisitions deal?

In an M&A deal, the acquirer pays the target company in either #cash or #stock. Thus, it becomes critical for the acquirer to decide when to use cash or shares as a #deal consideration.

In my experience,  when structuring the deal, acquirers use stock if their stock price gets overvalued; they have a limited borrowing capacity and excess cash balances. However, acquirer shares might be attractive for the seller if they have favourable growth prospects.

I also look at stock consideration when valuing the target firm is difficult, such as when the target has hard-to-value intangible assets or extensive R&D outlays.

In the case of small acquirers, the scenario changes. These acquirers may not have access to relatively inexpensive debt financing. Consequently, they may get inclined to finance their acquisition of targets by allotting equity. As equity is a higher-cost funding source, its use to finance investments can lessen purchase price premiums. In contrast, acquirers having access to cheap debt financing can borrow to finance their acquisitions and tend to overbid target firms.

Thus, #privateequityfirms are overpaying for the targets because they can borrow capital at very #lowinterestrates.

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