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Chapter 11

2.3 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.

 Bootstrapping opportunity – if the bidder has a higher P/E ratio
than the acquired entity.

 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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