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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

A listed company acquires a smaller rival and funds the purchase by issuing its own shares to the target's shareholders. Which feature distinguishes this from a cash-funded takeover?

In a share-exchange takeover, the target's shareholders receive shares in the acquirer and so remain part-owners of the enlarged company, sharing in future gains and risks. A cash deal instead ends their interest. Gearing does not necessarily rise, and existing holders are diluted.

  1. ATarget shareholders become part-owners of the enlarged company and share in its future risks and gainsCorrect
  2. BThe acquirer's gearing necessarily rises
  3. CTarget shareholders receive an immediate taxable cash sum and no further interest
  4. DThe deal cannot be called a takeover
  5. The acquirer's control is unaffected whatever the number of shares issued

Explanation

In a share exchange the target's holders receive shares in the acquirer, so they retain an interest in the combined firm and share its outcomes. Gearing need not rise since no debt is raised, and issuing shares dilutes existing holders' control.

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