Question 11.Qfr.4: What are the major considerations that an acquiring company ...

There are a large number of factors that will influence a company on the way it decides to structure its financing of a takeover bid, as follows.

• The tax position of the target company’s shareholders: if they are tax exempt, they may prefer a cash offer as they will not incur capital gains tax. If they are liable for capital gains, they may prefer a share-for-share offer. If there is a range of investors in different tax-paying positions, a mixed bid may be more appropriate.
• The acquiring company’s level of liquidity and ability to borrow funds: this will determine whether it can find sufficient funds in order to make a cash offer.
• The acquiring company’s share price: if its share price is high compared to the target company’s share price, the acquirer will not have to issue too many shares if it makes a share-for-share offer, reducing any potential dilution of EPS and control.
• The attitudes and preferences of shareholders: the acquiring company’s shareholders may not want it to borrow for a cash offer because this may increase financial risk beyond what they are prepared to tolerate. A cash offer may be unattractive to the target company’s shareholders because they no longer have a participating interest in the company that they originally bought shares in.