chooses to pay cash for the deal, then the SVA for its shareholders is simply the expected synergy of $1.7 billion minus the $1.2 billion premium, or $500 million.īut if Buyer Inc. The expected net gain to the acquirer from an acquisition-we call it the shareholder value added (SVA)-is the difference between the estimated value of the synergies obtained through the acquisition and the acquisition premium. is therefore $4 billion, representing a premium of $1.2 billion over the company’s preannouncement market value of $2.8 billion. They announce an offer to buy all the shares of Seller Inc. estimate that by merging the two companies, they can create an additional synergy value of $1.7 billion. Seller Inc.’s market capitalization stands at $2.8 billion-40 million shares each worth $70. is $5 billion, made up of 50 million shares priced at $100 per share. wants to acquire its competitor, Seller Inc. To see how that works, let’s look at a hypothetical example. More precisely, in stock transactions, the synergy risk is shared in proportion to the percentage of the combined company the acquiring and selling shareholders each will own. In stock transactions, that risk is shared with selling shareholders. The main distinction between cash and stock transactions is this: In cash transactions, acquiring shareholders take on the entire risk that the expected synergy value embedded in the acquisition premium will not materialize. But first let’s look at the basic differences between stock deals and cash deals. In this article, we provide a framework to guide the boards of both the acquiring and the selling companies through their decision-making process, and we offer two simple tools to help managers quantify the risks involved to their shareholders in offering or accepting stock. But when companies are considering making-or accepting-an offer for an exchange of shares, the valuation of the company in play becomes just one of several factors that managers and investors need to consider. Price is certainly an important issue confronting both sets of shareholders. It’s not that focusing on price is wrong. Both managers and journalists tend to focus mostly on the prices paid for acquisitions. In a cash deal, the roles of the two parties are clear-cut, but in a stock deal, it’s less clear who is the buyer and who is the seller.ĭespite their obvious importance, these issues are often given short shrift in corporate board-rooms and the pages of the financial press. What’s more, the findings show that early performance differences between cash and stock transactions become greater-much greater-over time. In studies covering more than 1,200 major deals, researchers have consistently found that, at the time of announcement, shareholders of acquiring companies fare worse in stock transactions than they do in cash transactions. The decision to use stock instead of cash can also affect shareholder returns. Companies that pay for their acquisitions with stock share both the value and the risks of the transaction with the shareholders of the company they acquire. In some cases, the shareholders of the acquired company can end up owning most of the company that bought their shares. But in an exchange of shares, it becomes far less clear who is the buyer and who is the seller. In a cash deal, the roles of the two parties are clear-cut, and the exchange of money for shares completes a simple transfer of ownership. This shift has profound ramifications for the shareholders of both acquiring and acquired companies. But just ten years later, the profile is almost reversed: 50 % of the value of all large deals in 1998 was paid for entirely in stock, and only 17 % was paid for entirely in cash. In 1988, nearly 60 % of the value of large deals-those over $100 million-was paid for entirely in cash. What is striking about acquisitions in the 1990s, however, is the way they’re being paid for. As markets globalize, and the pace at which technologies change continues to accelerate, more and more companies are finding mergers and acquisitions to be a compelling strategy for growth. After all, acquisitions remain the quickest route companies have to new markets and to new capabilities. Compare that with the 4,066 deals worth $378.9 billion announced in 1988, at the height of the 1980s merger movement. targets were announced for a total value of $1.63 trillion. In 1998 alone, 12,356 deals involving U.S. The legendary merger mania of the 1980s pales beside the M&A activity of this decade.
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