M&A: Question & Answer - Deal Structuring and Financing

Q&A: Deal Structure & Financing

• Why are terms a very important component of any M&A transaction? How do terms influence price?
• Price can't significantly deliver control, but by implementing terms as subject to negotiations, acquirer could dictate the negotiation situations in order to better deliver control and push target company to accept the deal.
• Terms could influence price by using it as a bargaining chips. For example: 
• Final price bid --> final offer, acquirer's final decisions, price will not going up no more, exit  negotiations if target continue to ask more.
• Deadline: timing of the offer price, not valid any more in certain due date.
• Multiple offer --> increase offer price by stages of bidding.
• Offer reasonable price for more synergies and benefits. Push more target to negotiation table.
• Penalty and limit of the offer.
• Terms can change the offer price. For example: 
• Conditions of the purchase --> Off-market and on-market, whether involve special considerations such as special dividend, stock repurchase, options to sell the stock.
• Timing and proceeding of the purchase --> Whether in the bad or good macroeconomic conditions, final date of acquisition will define how much new share to issue, etc.
• Financing of the purchase --> market and target company dislike acquirer with lots of debt level, considering the cash and liquidity of the acquirer, financing by stock is less desirable.
• Payment forms and contingencies --> is there any liquid cash? is acquirer leave any contingencies clause to target?
• Legal structure of the combined entity after the purchase --> how former target management will involve? Is the new legal form will cultivate more benefits to shareholders and perform well in the longer term?
• Why is stock offer less desirable than cash offer from an acquirer's standpoint? And from a target shareholder's standpoint?
• Acquirer will prefer Cash Offer, because:
• Quick executions, faster to implement, reduce uncertainty about the deal overcome.
• Market reactions: Positive --> buyer stock price will go-up, since market suspect undervalued of buyer's intrinsic firm. Also, thanks to adverse selection, market suspect buyer's optimism about the future value of merger synergies.
• Stock Offer will bring ownership dilution as the acquirer share control and risk with target shareholders.
• But, the negative side effects are: 
• increase leverage/reduce acquirer's liquidity --> raising risk of bankruptcy.
• Increase overpayment risk --> bidder's cash offer usually higher than target's stock price.
• Tax payment directly after the announcement.
• Target will probably prefer Stock Offer, because: 
• Gain from acquirer's overpayment and asking for higher price than current stock price.
• Still have control over a new entity and could earn more profits by selling the stock at better price in the future.
• Deferred tax liabilities, since no cash involvement.
• But, the negative side effects is: 
• If the performance of new entity is worsen thus this could drive slump fall in the stock price and so the potential benefits will loss. 
• Driving uncertainty in the outcome of the deal and often trigger drawn battle due to target's board play for time.
• Due to adverse selection, Stock Offer could trigger Negative Market reactions, since market suspect of buyer's lack of financial capabilities and overvalued buyer's intrinsic value.

• What firm and market conditions predict financing choice? Why?
• Prefer Cash Offer : in high market volatility, strong acquirer's firm capital structure and unused debt capabilities, uncertainty about macroeconomic conditions (negative outlook signal), acquirer prefer for quick executions and save more by reducing time wasting. Strongly offer in the undervaluation of buyer's intrinsic value or uncertainty in the synergies and benefits post-merger. Also, in the small size of target's relative size compare to acquirer.
• Prefer Stock Offer : in good/more stable market conditions (positive outlook signal), acquirer lack of financial strength due to their limitation of cash and unused debt. Short-term profits, due to target could sell their stock in the future with better price. In overall large target's relative size, due to difficulty to fund acquisition with internal funding. 

• Why do acquirers sometimes use contingent payments?
• Uncertainty about the share price and market reaction in the final agreement date (highly volatility).
• Potentially acquirer's share price will fall significantly and so acquirer will issue more shares to maintain the same offer price --> ownership will diluted for something that wasn't the fault of acquirer.
• Wide disagreement about target's current value and benefits/costs of new legal entity after the merger.
• No guarantee about the new entity stock's future value 

• How can acquirers ameliorate target shareholder's risk aversion in stock deals?
• Minimum purchase price guarantee --> buyer gives put option (right to sell stock back to buyer at certain price)
• Purchase price collar --> with a fixed exchange risk, target get a minimum $ purchase price and also maximum $ price.
• Walk away clause --> deal is cancelled if Buyer's stock price falls too far.