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

Which statement best describes the effect on control of a bidder's existing shareholders when an acquisition is paid for by a large new share issue to the target's shareholders?

A large share-for-share issue dilutes the voting percentage of the bidder's existing shareholders, possibly below the thresholds needed to block special resolutions or hold a majority. Issuing at fair price protects value but not control, whereas cash or debt funding preserves voting proportions.

  1. AExisting shareholders' voting percentage is diluted, and may fall below blocking or majority thresholdsCorrect
  2. BVoting control is unaffected because only earnings change
  3. CVoting control increases because total equity rises
  4. DControl is unaffected provided the issue is at market price

Explanation

Issuing shares to target holders increases the share count, so each existing holder owns a smaller percentage of votes. Pricing at market value protects value, not voting percentage. Debt or cash funding avoids this dilution.

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