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

Bidder plc is considering acquiring Target Ltd and can pay either in cash or by issuing its own shares. Which of the following is a recognised feature of a share-for-share offer, compared with a cash offer, from the point of view of Target's shareholders?

Target's shareholders in a share-for-share offer become owners of the enlarged group, so they share in the synergy gains and also bear the risk that those gains do not materialise. Cash offers give certainty of value, whereas share offers leave the value dependent on the bidder's share price.

  1. AThey bear part of the risk that synergies are not achieved, because they become shareholders in the combined companyCorrect
  2. BThey receive certainty of value regardless of Bidder's share price movements
  3. CThey are immediately liable to a capital gains tax charge on the full consideration in all cases
  4. DThey lose any right to share in future gains of the combined entity

Explanation

With a share exchange, Target's shareholders hold shares in the enlarged company, so they share both the potential synergy gains and the risk of failure. A cash offer gives certainty of value, so option B describes cash. Many tax regimes allow rollover relief on share exchanges, so C is wrong, and D is the opposite of the truth.

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