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

Which statement best describes the usual market reaction and its implication when a bidder finances an acquisition with newly issued shares rather than cash from internal funds?

Issuing shares to fund a bid may signal management thinks its shares are overvalued, so the bidder's price can fall. Gearing falls, but that does not guarantee a rise. Share exchanges also let target shareholders share in synergies and risks.

  1. AShare financing may signal that the bidder believes its shares are overvalued, which can depress the bidder's share priceCorrect
  2. BShare financing always raises the bidder's share price because gearing falls
  3. CShare financing has no signalling effect under semi-strong market efficiency
  4. DShare financing removes all risk of the target's shareholders sharing in synergies

Explanation

Under signalling arguments, managers who issue shares may be viewed as thinking them overvalued, so announcements often lower the price. Gearing benefits do not guarantee a rise. Share exchanges actually let target holders share synergies and risk.

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