methods of payment (mergers and acquisitions)

Methods of Payment

By- Ayush GuptaUniversity Business School

MBA-IB

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Basic M&A Transactions

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Methods of Payments• Cash

• Share Exchange

• Cash Underwritten Share

• Loan Stock

• Convertible Loan or Preference Shares

• Deferred Payment

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₹1450 crore

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• Share Exchange


• Debentures



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BUYERBUYER SELLERSELLER

BUYERBUYER SELLERSELLER

Institutional Institutional InvestorInvestor

• Cash Underwritten ShareA.G


• Share Exchange


• Debentures



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Factors Affecting Choice of Financing Method for

M&A• Acquirer’s liquidity position.

• Acquirer’s recent stock price performance.

• Pre-Acquisition leverage.

• Nature of Business being acquired.

• Ownership and control structure of acquirer

• Ownership and control structure of target firms.

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Cash vs Stock offerBuyer IncBuyer Inc Seller IncSeller Inc

$5B = 50M × $100 $2.8B = 40M × $70

$1.7B• Buyer Inc announce offer to buy all shares of

Seller Inc at $100 per share.

• Value placed on Seller Inc is $4B, a premium of $1.2B

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Shareholder Value Added

• Difference between estimated value of synergy and acquisition premium

• If Buyer Inc. chooses to pay cash then

SVA = $1.7B(expected synergy) - $1.2B(premium) = $500M

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• If Buyer Inc. finance by issuing new shares

• acquiring shareholders will own 55.5% of total 90M shares

• their expected SVA is 55.5% of $500M i.e $277.5M

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Buyer IncBuyer Inc Seller IncSeller Inc

Cash offer $500M

Stock offer $277.5M $222.5M

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See you soon

Thank You Very Much

References• Ray, K. (2011). Mergers and acquisitions:

Strategy, valuation and integration. New Delhi: PHI Learning Private Limited.

• Stock or Cash?: The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions. (1999, November 1). Retrieved September 8, 2015.