All Cash All Stock Offer - Explained
What is an All-Cash-All-Stock Offer?
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Table of ContentsWhat is an All Cash, All Stock Offer?How does an All Cash, All Stock Offer Work?Academic Research on All Cash, All Stock Offers
What is an All Cash, All Stock Offer?
The all-cash, all-stock offer is a method of acquisition in which the acquirer agrees to buy all the target firm's outstanding shares for a stated price in cash. It can also be defined as the purchase for cash of all outstanding shares of another company, from the companys shareholders. Generally, all cash, all stock offers are considered as a way to finish an acquisition. Offering a premium over the current trading shares price is a great method that can be used by the acquiring company to make the deal look juicy and try to win over indecisive shareholders to agree to purchase the deal.
How does an All Cash, All Stock Offer Work?
An all cash, all stock offer also has its disadvantages, one of which is the taxable event accompanied by the shareholders shares sales. A large amount of the shareholders earnings is taken by taxes if the initial amount paid by investors to get their shares is lower than the price the shares were sold, even if their shares are sold at a premium to the acquirer. Furthermore, a way for investors to exit a company whose future is in question or whose company has a stock with a struggling price is to sell his shares for a premium. An exchange can also be carried out between the acquiring company and the shareholders - the shares held by the acquiring company in the target company for the acquiring companys shares.
Academic Research on All Cash, All Stock Offers
- Stock or cash? The trade-offs for buyers and sellers in mergers and acquisitions., Rappaport, A., & Sirower, M. L. (1999). Stock or cash? The trade-offs for buyers and sellers in mergers and acquisitions. Harvard business review, 77(6), 147-58. In 1988, less than 2% of large deals were paid for entirely in stock; by 1998, that number had risen to 50%. The shift has profound ramifications for shareholders of both the acquiring and acquired companies. In this article, the authors provide a framework and two simple tools to guide boards of both companies through the issues they need to consider when making decisions about how to pay for--and whether to accept--a deal. First an acquirer has to decide whether to finance the deal using stock or pay cash. Second, if the acquirer decides to issue stock, it then must decide whether to offer a fixed value of shares or a fixed number of them. Offering cash places all the potential risks and rewards with the acquirer--and sends a strong signal to the markets that it has confidence in the value not only of the deal but in its own stock. By issuing shares, however, an acquirer in essence offers to share the newly merged company with the stockholders of the acquired company--a signal the market often interprets as a lack of confidence in the value of the acquirer's stock. Offering a fixed number of shares reinforces that impression because it requires the selling stockholders to share the risk that the value of the acquirer's stock will decline before the deal goes through. Offering a fixed value of shares sends a more confident signal to the markets, as the acquirer assumes all of that risk. The choice between cash and stock should never be made without full and careful consideration of the potential consequences. The all-too-frequent disappointing returns from stock transactions underscore how important the method of payment truly is.
- Why do some firms give stock options to all employees?: An empirical examination of alternative theories, Oyer, P., & Schaefer, S. (2005). Why do some firms give stock options to all employees?: An empirical examination of alternative theories. Journal of financial Economics, 76(1), 99-133. Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and employee retention. We gather data from three sources on firms stock option grants to middle managers. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. We also conduct a cross-sectional regression analysis of firms option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.
- Stock repurchase by tender offer: An analysis of the causes of common stock price changes, Masulis, R. W. (1980). Stock repurchase by tender offer: An analysis of the causes of common stock price changes. The Journal of Finance, 35(2), 305-319.
- Target revaluation after failed takeover attempts: Cash versus stock, Malmendier, U., Opp, M. M., & Saidi, F. (2016). Target revaluation after failed takeover attempts: Cash versus stock. Journal of Financial Economics, 119(1), 92-106. Cash- and stock-financed takeover bids induce strikingly different target revaluations. We exploit detailed data on unsuccessful takeover bids between 1980 and 2008, and we show that targets of cash offers are revalued on average by +15% after deal failure, whereas stock targets return to their pre-announcement levels. The differences in revaluation do not revert over longer horizons. We find no evidence that future takeover activities or operational changes explain these differences. While the targets of failed cash and stock offers are both more likely to be acquired over the following eight years than matched control firms, no differences exist between cash and stock targets, either in the timing or in the value of future offers. Similarly, we cannot detect differential operational policies following the failed bid. Our results are most consistent with cash bids revealing prior undervaluation of the target. We reconcile our findings with the opposite conclusion in earlier literature (Bradley, Desai, and Kim, 1983) by identifying a look-ahead bias built into their sample construction.
- The adverse selection effect of corporate cash reserve: Evidence from acquisitions solely financed by stock, Gao, N. (2011). The adverse selection effect of corporate cash reserve: Evidence from acquisitions solely financed by stock. Journal of Corporate Finance, 17(4), 789-808. Corporate cash reserve has an adverse selection effect. Specifically, if investors know a company does not have to issue to invest, an attempt to do so sends a strong signal of overvaluation. This notion has not been explicitly studied in the extant empirical literature, despite its intuitiveness. Using a sample of acquisitions solely financed by stock to exclude the potential complications of free cash flow, I find that announcement returns are lower for a bidder with a higher excess cash reserve. This effect is stronger in hot equity market years or when a bidder's standalone value is more difficult to evaluate. I also find evidence supporting the idea that targets request cash payment to remove lemon bidders in normal (non-hot equity market) years, but accept too many stock offers in hot equity market years. After acquisitions, high-excess-cash-reserve bidders operationally outperform low-excess-cash-reserve bidders. Further, they spend more funds on reducing debt but not more on investments, compared with low-excess-cash-reserve bidders. Combined, these results show that cash reserve has information costs. Further, they highlight the importance of the two-sided information asymmetry framework of Rhodes-Kropf and Viswanathan (2004) in describing merger outcomes without resorting to behavioral or agency explanations.