16.5 Purchase Price and the Payment Method 47916.5.2 Choice of the Payment Method
The acquirer should of course seek a form of payment that is both attractive to the
vendor and acceptable to the acquirer itself. The choice of the payment method
depends on the circumstances as the following examples can illustrate:
- A public share exchange offer to relatively uninformed target shareholders may
cause a negative market reaction as investors hedge against the possibility that
the bidder’s shares are overpriced.^65 - A high market valuation of the acquirer’s shares encourages the acquirer to use
its overpriced shares as a means of payment. According to a study, bids in fact
tend to look better in the eyes of the target when the market is overvalued.^66 - In share deals and share offers, contingent payment forms allow the acquirer
and the vendor to share the risk that the acquirer’s or target’s shares are overva-
lued.^67 - Mixed offers can be attractive, because neither party knows the true value of
the other firm or its shares (two-sided information asymmetry).^68 - Some bidders select cash over shares to avoid diluting private benefits of cont-
rol.^69
Cash payment. A cash payment can be attractive to the vendor as the vendor can
use cash immediately, either for consumption or reinvestment, without having to
incur any cost. The vendor may be able to get a better price when it uses a combi-
nation of different kinds of payment obligations including contingent payments
(for the adjustment of the purchase price, see section 16.5.3 below).
From the perspective of the acquirer, a cash payment can cause problems, be-
cause cash may not be available or might only be raised by borrowing or issuing
shares or loan stock to investors for cash.^70
If the form of consideration is anything other than cash, the price term tends to
become fairly complex.^71
Shares. Where the vendor receives shares that it does not wish to keep, it must
incur cost and effort to turn them into cash. However, shares may be attractive to a
vendor who prefers to become shareholder in the acquirer. In many cases, the
ownership of shares brings private benefits (Volume I).
(^65) See Betton S, Eckbo BE, Thorburn KS, Corporate Takeovers. In: Eckbo BE (ed), Hand-
book of Corporate Finance: Empirical Corporate Finance, Volume 2. North-
Hollande/Elsevier, Handbooks in Finance Series (2008), Chapter 15.
(^66) Rhodes-Kropf M, Viswanathan S, Market Valuation and Merger Waves, J Fin 59 (2004)
pp 2685–2718. See Betton S, Eckbo BE, Thorburn KS, op cit.
(^67) Betton S, Eckbo BE, Thorburn KS, op cit.
(^68) See ibid.
(^69) See ibid.
(^70) McLaney E, Business Finance. Sixth edition. Pearson Education, Harlow (2003) p 381.
(^71) See Bainbridge SM, Mergers and Acquisitions. Foundation Press, New York (2003) pp
175–177.