3. How Much and How to Pay

Once we have identified the Purchase Price Range, the next step is to determine the actual offer price within that range. Also, the bidder has to decide whether the deal should be for cash, for stock, for a mixture of cash and stock, or for other assets. Put differently, the bidder has to answer the questions of:

  • How much to pay?
  • How to pay?

 

The following table summarizes the key considerations with respect to these questions from the point of view of the acquirer and the target company:

   

How much?

How? (cash, stock, etc.)

Acquirer’s perspective:

  • Value of net synergy
  • Target’s contribution to net synergy
  • Willingness to share the benefits
  • Alternative acquisition opportunities
  • Alternative bidders for same target
  • Takeover defense mechanisms of target firm
  • Disclosure requirements
  • Value of control (control premium)

Acquirer’s perspective:

  • Available cash and borrowing capacity
  • Size and duration of EPS dilution
  • Size of the transaction
  • Willingness to share risk
  • Over- or undervaluation of own securities
  • Value of control

Target’s perspective:

  • Number of bidders
  • Contribution to net synergy
  • Defense mechanisms
  • Stand-alone valuation
  • Alternative opportunities
  • Potential tax liabilities

Target’s perspective:

  • Appeal of acquirer’s stock
  • Preference for cash or stock
  • Tax implications
  • Upside potential of target
  • Upside potential of merged firms
 

 

  

How much and how the acquirer pays for the target firm obviously has implications for the value creation and value allocation, and it has potentially important implication for the allocation of risk, ownership, and control. In the following section, we present a relatively simple model that allows us to better understand these important deal elements.