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Chapter 11

2.2 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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