Should I make acquisitions with cash or paper?
I would prefer to pay in paper than cash. Is this sensible and if the seller accepts to sell this way, how much more should I expect to pay than if it was a cash deal?
A. Alysoun Stewart of Grant Thornton writes:
I am assuming from your question that your company is a private one and that you are already aware that most vendors will not entertain an offer based upon paper issued by a private company. There are many reasons for this reluctance: there is no market for shares in a private company so the asset is illiquid; the value of the shares is highly subjective meaning the vendor would be accepting a significant level of investment risk, which as a minority shareholder in the new structure, they would no longer have the ability to control and manage. All of which means that the paper price would go up significantly above the cash price – by how much would depend on a number of factors, not least the vendor’s perception of the risks of attaching to your company and its potential development in the future.
However, if there are evident synergy benefits from the merger of the businesses, the vendor may see paper as allowing them to see continuing growth in their equity value within the larger group, particularly if they wish to remain an active part of the senior management team. This would bear the hallmarks of a merger, albeit through the acquiring by one of the other. A combined entity is able to take advantage of commercial opportunities that were otherwise out of reach, though in such a case, a shareholders’ agreement would probably be necessary to govern the relationship.
There is also the potential advantage that a share consideration has the potential to delay the vendor’s capital gains tax payable until the date of the sale of the shares received. Even in these circumstances, though, a vendor would still require a significant premium over a cash purchaser.
It would be hard to envisage any circumstances in which the consideration payable in paper would not end up being considerably more expensive than a payment in cash, even if this had to be financed with debt. You would have to be prepared to part with a higher stake in your group to pay for the risk premium and so would be giving away some of the synergy value of the combined entity you are acquiring. Bringing the vendor in as part of your business, which may also not be desirable. All in all, it may be cheaper, easier and cleaner in the long term to make a cash offer financed by debt.