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Strategic aspects of acquisitions

5.4 Share for share exchange

Advantages

 A share exchange can be used to finance very large acquisitions.

 No cash needed – the bidding company does not have to raise
cash to make the payment.

 Shareholder capital is increased – and gearing similarly improved
– as the shareholders of the acquired company become
shareholders in the post-acquisition company.

Disadvantages

 Sharing gains – The bidding company’s shareholders have to
share future gains with the acquired entity, and the current
shareholders will have a lower proportionate control and share in
profits of the combined entity than before.

 Price risk – there is a risk that the market price of the bidding
company's shares will fall during the bidding process, which may
result in the bid failing.

For example, if a 1 for 2 share exchange is offered based on the
fact that the bidding company's shares are worth approximately
double the value of the target company's shares, the bid might fail
if the value of the bidding company's shares falls before the
acceptance date.

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