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

In a share-for-share offer, why is the value received by target shareholders described as uncertain, compared with a cash offer?

Target shareholders receive a fixed number of acquirer shares, so the value they receive moves with the acquirer's share price until and after completion. A cash offer gives a certain amount. The exchange ratio fixes share numbers, not the currency value of the consideration.

  1. AThe value depends on the acquirer's share price after the announcement and completionCorrect
  2. BThe value is fixed by the exchange ratio in currency terms
  3. CThe target shareholders must pay capital gains tax immediately
  4. DThe acquirer's gearing is increased by the issue

Explanation

With a share exchange the consideration is a number of acquirer shares, so its value moves with the acquirer's price. Cash gives a fixed amount. The ratio is fixed in shares, not currency. Share issues do not raise gearing, and tax deferral is often a benefit, not a drawback.

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