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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

A bidder's directors are choosing between a cash offer and a share exchange. Which circumstance most strongly favours a cash offer?

A cash offer is favoured when the bidder believes its own shares are undervalued, because issuing shares at a low price would transfer too much of the combined company to target shareholders. Other factors such as high gearing, risk sharing and tax deferral point towards a share exchange.

  1. AThe bidder believes its own shares are currently undervalued by the marketCorrect
  2. BThe bidder has high gearing and wishes to conserve debt capacity
  3. CThe bidder wants target shareholders to share in the integration risk
  4. DThe target's shareholders wish to defer capital gains tax

Explanation

If the bidder's shares are undervalued, issuing them would give away more of the company than necessary, so cash is preferred. Options B, C and D each favour a share exchange: conserving debt capacity, sharing risk and enabling tax deferral.

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