Investments in Czech startups
4 April 2024
16 April 2024
In 2022, buyers chose stock or stock and cash as the payment method for about one-third of M&A transactions in the US. By contrast, just under 2% of large transactions three decades ago were settled entirely in shares.
In a cash transaction, the roles of the parties involved are clear, as the exchange of cash for shares allows for a simple transfer of ownership. In a share deal, however, the identification of buyer and seller is less clear. There are cases where the shareholders of the acquired company may end up owning a majority of the acquiring company. There are advantages and disadvantages to each option and considering these is essential for both buyers and sellers. So which option to choose?
In a cash acquisition, the acquiring company buys another entity solely with cash, without issuing any stock. This transaction type offers immediate liquidity to the shareholders of the target company and streamlines the deal's structure.
An example of an all-cash transaction was the acquisition of Seagen by Pfizer last year. Pfizer acquired all outstanding common stock of Seagen for $229 in cash per share, for a total enterprise value of approximately $43 billion.
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Cons:
A stock acquisition occurs when the acquiring company buys another entity solely using its own stock, without involving cash. In these transactions, the shareholders of the target company receive shares of the acquiring company's stock in exchange for their own shares.
One major advantage is that the acquiring company can maintain its cash reserves for other purposes. Alternatively, if they lack substantial cash reserves initially, they can avoid the need to seek external financing to facilitate the deal.
Similarly, for shareholders of the acquired company, there are considerable benefits. By receiving payment in the form of stock rather than cash, they can retain ownership of the stock, thereby deferring any capital gains taxes associated with the buyout. Additionally, there's the potential for growth in the new entity and the possibility of financial rewards stemming from it.
An example of an all-stock transaction was the acquisition of Hess by Chevron last year. Chevron offered 1.025 of its shares for each Hess share, or about $171 per share, implying a premium of about 4.9% to the stock's last close. The total deal value is $60 billion, including debt.
Pros:
Cons:
While cash transactions offer immediate liquidity and are simpler, equity transactions offer the potential for long-term appreciation of shares in new entity and synergies. Ultimately, the optimal payment method depends on market conditions, financial health, the specific circumstances of the transaction, the preferences of both parties and their strategic objectives.