Understanding ‘All stock deal’ vs ‘All cash deal’ and a mix of these!
The terms “All cash” and “All stock” are generally used with reference to mergers and acquisitions. Throwing light on what exactly is a merger or acquisition, it is nothing but a deal between two parties or companies where either a company purchases another one or in the first case, when two companies decide to merge into one organization.
The difference between a merger and an acquisition is that the former results in a completely new company whereas in case of an acquisition, since one company is acquired by another one, the acquired one loses its identity and starts functioning under the name of the acquiring company.
Such deals can occur in an all stock or all cash offer. An “all cash deal” basically refers to a cash purchase of a target company. When such a deal occurs, the equity portion of the balance sheet of the parent company remains unchanged. This is in direct contrast to the “all-stock deal” where the equity portion is greatly affected.
All cash mergers and acquisition deals are those that take place without any exchange of stock or equity, this is because the trading happens in cash. The acquiring or the parent company purchases the shares of the company being acquired solely in cash. Needless to say, this situation only occurs when the company which is acquiring the other one is much larger as compared to the other firm and has much more amount of cash too. This states that the financial position of the parent company is not adversely affected by entering into an all-cash deal and also that this doesn’t lead to a shortage of cash funds in the company.
Such an all cash deal also occurs with no buyer financing. However, this method of payment might also have significant drawbacks. For instance, this might come along with tax restrictions or the loss of earning power of money which is invested in the transaction.
Now, as the technologies continue to pace, more and more companies are opting for mergers and acquisitions to give way to an accelerated growth in the future. This method, undoubtedly, is the quickest growth for companies to new markets and capabilities.
Such mergers and acquisitions can either take the form of an all cash deal or an all stock deal. However, if we look at the trends, in 1988, almost 60% of all the merger and acquisition deals were paid for entirely in cash and these were not just small value but deals that have a huge sum of money involved. Only 2% of the deals were paid for in stock. Just almost a decade later, the scenarios had much reversed. In 1998, almost more than 50% of the total deals were made in stock and only 17% or so were paid for in cash.
This shift leaves major consequences to be born for the shareholders of both the acquired and the acquiring company. For instance, in all cash deal, the roles of both the parties are clear cut and a simple exchange of money for shares completes a simple transfer of ownership. But in case where there is an exchange of shares, it becomes far less clear that who amongst the two parties is the buyer and who is the seller. This implies that there is a lot of ambiguity regarding which company is being acquired and by whom. Also, there is a lot of possibility of the case becoming one of the examples of fraud. This is because in many cases, the acquired company itself might end up owning most of the shares of the new company when the payments are being made in stock. Thus, technically, the case doesn’t account for an acquisition then.
However, if we look at the pros of paying for the acquisition in shares, there are many. For instance, companies that pay in stock and cash both generally end up sharing the risk and value both of the new company with the acquired company. Also smaller companies, when they are not able to retain themselves and are looking for a merger or an acquisition deal with a big name, generally prefer to go for a deal where the acquirer is willing to pay for the deal in shares or as a combination of both stock and cash.
Needless to say, the final decision to choose amongst the options available for payment rests with the acquirer only.
Not only this, but the decision to pay in shares rather than cash also has an impact on the shareholders’ returns, since when paid in cash, the number of shares reduce and hence the share price is also affected. Most of the time and as per past records, shareholders of acquiring companies fare worse in stock transactions than they do in cash deals. Moreover, these differences in the earning spree keep on widening with time!
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