design of consideration in acquisitions cash and stock offers

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1、6DesignofConsiderationinAcquisitions:CashandStockOffersVISHWANATHS.R.ANDCHANDRASHEKARKRISHNAMURTICHAPTEROBJECTIVESHighlightstheimportanceofchoiceofmethodofpaymentinacquisitionsProvidesaframeworkforchoosingbetweencashandstockpaymentHighlightstheimpactofmethodofpayment

2、onfinancialperformanceSuggestsamethodologyforestimationofexchangeratioTheacquirercanpaythetargetcompanyincashorexchangesharesinconsideration.45.6percentof4,256dealsdoneintheUSbetween1973and1998werepaidincash.Thepercentageofstockdealsisincreasing.Exhibit6.1presentsthec

3、haracteristicsanddescriptivestatisticsbydecade.Theanalysisofacquisitionforsharesasopposedtoacquisitionforcashisslightlydifferent.Thestepsinvolvedintheanalysisare:Estimatethevalueofacquirers(self)equity.Estimatethevalueoftargetcompanyequity.Calculatethemaximumnumberof

4、sharesthatcanbeexchangedwiththetargetcompanysshares.Conducttheanalysisforpessimisticandoptimisticscenarios.DesignofConsiderationinAcquisitions:CashandStockOffers147EXHIBIT6.1Characteristicsanddescriptivestatisticsbydecade,1973–981973–791980–891990–981973–98N7891,4272

5、,0404,256Allcash%38.345.327.435.4Allstock%37.032.957.845.6Anystock%45.145.670.957.6Source:Andradeetal.(2001).Break-upaccordingtothemethodofpayment,byyearYearTotalCashpaymentMixedpaymentStockpaymentPercentNPercentNPercentNoftotaloftotaloftotal1985522650815183519866543

6、6671115231987492755361939198861457471191519971183933987059Total85934240901042750Source:HeronandLie(2002).Exchangeratioisthenumberofacquiringfirmssharesexchangedforeachshareofthesellingfirmsstock.SupposeCompanyAistryingtoacquireCompanyBs100,000sharesatUS$230.So,thecosto

7、facquisitionisUS$23,000,000.CompanyAhasestimateditsvalueatUS$200pershare.TogetoneshareofCompanyB,Ahastoexchange(230/200=)1.15shareor115,000sharesfor100,000sharesofB.AssumethattheacquiringCompany(B)has115millionshares,whereasthetargetCompany(A)has175millionshares.Thee

8、xchangeratiois0.6.Therelativeownershipofthetwofirmsafterthemergerisshownbelow.SharesoutstandingSharesinthemergedcompanyMillionExchan