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Strategic aspects of acquisitions

5.3 Cash offer

Advantages

 Speed – when the bidder has sufficient cash the takeover can be
achieved quickly and at low cost.

 Certainty about the bid's value i.e. there is less risk compared to
accepting shares in the bidding company.

 Increased liquidity to target company shareholders i.e. accepting
cash in a takeover, is a good way of realising an investment.

 Lower cost to bidder – the acceptable consideration is likely to be
less than with a share exchange, as there is less risk to target
company shareholders.

Disadvantages

 Taxable chargeable gain – will often arise if shares are sold for
cash, but the gain may not be immediately chargeable to tax under
a share exchange.

 Target company shareholders are bought out – so may be
unhappy with a cash offer, since they do not participate in the new
group. This could be seen as an advantage of a cash offer by the
bidding company shareholders if they want to keep full control of
the bidding company.

 Financing problems – with larger acquisitions the bidder must
often borrow in the capital markets or issue new shares in order to
raise the cash. Increased borrowing may have an adverse effect
on gearing, and also cost of capital due to the increased financial
risk.

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