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

Dalton plc buys Everett Ltd for $60 million and pays Everett's vendors in new Dalton shares, then arranges a vendor placing in which the newly issued shares are sold by the vendors' placing agent to institutional investors for cash. The vendors receive $60 million in cash from the placing. Which statement best describes the effect of this structure?

In a vendor placing the acquirer issues shares to the target's vendors, and these shares are immediately placed with institutions for cash. The vendors therefore receive cash, while the acquirer has effectively paid with equity and no cash leaves the acquirer.

  1. ADalton pays cash out of its own reserves to the vendors
  2. BVendors receive cash while Dalton effectively issues shares, with no cash leaving DaltonCorrect
  3. CDalton must first make a rights issue to its existing shareholders
  4. DThe vendors keep the shares and receive a deferred cash payment

Explanation

In a vendor placing the acquirer issues shares to the vendors, who sell them to institutions for cash. The vendors get cash, and Dalton funds the deal by issuing shares without paying cash itself. It is not a rights issue, and the vendors do not keep the shares.

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