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What are some important factors in deciding whether to use stock or cash in an acquisition?

What are some important factors in deciding whether to use stock or cash in an acquisition?

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Answer #1

Below are a few important factors in deciding whether to use stock or cash in an acqusition.

Management Confidence in Acquisition:

If management has great confidence, they will prefer paying in cash. Because the management believes the shares will worth more after the resulting synergies after the merger.

Share Valuation:

If the acquirer's shares are considered overvalued, management may prefer to pay for the acauisition with shares. Conversly, if they believe that the shares are undervalued, they prefer to pay through cash.

Financing Requirements:

Acquirers who are not cash rich will require external financing. In this case, acquirers will consider the impact of financing on their cost of capital, capital structure and financial ratios.

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