16.5 Purchase Price and the Payment Method 481Table 16.1 Differences Between Cash Offers and Share Offers
Cash offer Share offer
The acquirer’s perceived risk is low
and the acquirer prefers a high
leverage.The acquirer will be exposed to a high level of
risk. For example, the acquirer does not have
enough useful information about the target or
the target has invested in high-risk projects.
The acquirer has surplus cash. For
example, the acquirer may have a
high cash-flow compared with the
size of the target.The acquirer has limited access to cash. For ex-
ample, the cash flow of the acquirer may be
small compared with the size of the target.The acquirer has shareholder-value
oriented corporate governance objec-
tives when: it acquires a large target;
it has controlling shareholders; and/or
its managers hold a large block of
shares in the acquiring firm.The acquirer prefers to change its ownership
structure. For example, the acquirer wants a
more dispersed ownership structure or expects
business benefits from the joining of the vendor
as shareholder.Shareholders’ perceived risk is high. The vendors’ perceived risk is low. For exam-
ple, vendors are more likely to accept a share
offer in a bull market.
The acquisition is an MBO. The acquirer is controlled by its management
(“empire building”).16.5.3 Adjustment of Consideration
General Remarks
The simplest way to determine the purchase price is to agree on a fixed cash
amount payable at closing. Price adjustments mechanisms can nevertheless lead to
a higher or lower price. Such mechanisms are common when the target company
is privately-owned, and in asset deals. The bookbuilding method is a particular
way to adjust price in IPOs (see section 10.5.2). Price adjustment can take place at
closing or after closing, and both in cash offers and share offers.
Cash Offers
In cash offers, the adjustment of purchase price can take place: at closing; after
closing (variable purchase price); as a sanction for misstatements; and, in some
cases particularly where the target is a listed company, by virtue of the principle of
the equivalent treatment of all holders of securities of the same class.
At closing. The use of the customary conditions precedent to closing can give
the acquirer an opportunity to renegotiate the purchase price. The acquirer should
have ensured that it has an option to finalise the transaction even when conditions
precedent have not been fulfilled (section 12.5 and Volume II). An unfavourable
due diligence report, non-compliance with representations and warranties, a mate-
rial adverse change, or any other condition precedent that has not been fulfilled