Interesting, because we have come full circle. The low point of the market is precisely that point where cash is the preferred currency if the acquiring company believes that its stock is undervalued.
Other than that specific case and taxes (see below) I think that there is little practical difference between using cash and stock to fund a buy-out, regardless of whether it is friendly or hostile.
My assumption is that the capitalized value of the combination ought to be the sum of the capitalized values of the individual companies less banking fees plus any premium that investors place on the combination due to synergies. Furthermore, I assume that the acquirer has access to the capital markets either to issue debt or equity as a source of cash to fund the transaction.
If that is the case, other than tax considerations (which would have to do with the accounting issue of purchase accounting vs. pooling of interests) do you think that the capital structure of the acquiring company would exert an impact on the purchase price? The acquirer could purchase for cash, then sell equity. In other words, tax considerations aside, the timing of each change in capital structure ought not determine the final value of the combination nor of the ultimate purchase price.
The reality of taxes makes it cheaper to acquire under a pooling of interests. [Is there any rule that precludes a hostile takeover using pooling of interest accounting?] So, given the realities of taxes, the optimal approach might be to acquire under pooling of interests first (which makes the transaction tax-free for existing shareholders), and then to repurchase an appropriate number of shares.
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There was an interesting study some time back that showed that combinations resulting from hostile takeovers were much more successful than friendly mergers. As I recall, the reason provided was that the acquirer was free to remove entrenched management and make required changes to the business model, while friendly acquisitions tended to perpetuate the status quo and in addition was often overly generous to existing management.
TTFN,
CTC |
