M&A Deal Structure

In an all-cash deal, the acquirer pays the target's shareholders entirely in cash. Cash deals are straightforward and provide certainty of value to the seller. They are typically funded through existing cash on hand, new debt issuance, or a combination of both, as outlined in the sources and uses. Cash deals are generally taxable events for the seller's shareholders, who must recognize capital gains immediately.

In an all-stock deal, the acquirer issues new shares to the target's shareholders at a fixed exchange ratio. Stock deals can be structured as tax-free reorganizations, which is a major advantage for sellers. However, stock deals expose the seller to the acquirer's share price risk between announcement and closing. Stock deals dilute existing acquirer shareholders but do not require raising debt or depleting cash reserves. The exchange ratio determines how many acquirer shares each target shareholder receives.

Many deals offer a mix of cash and stock to balance the interests of both parties. The mix allocation affects both the tax treatment and the risk profile of the deal. Some transactions offer target shareholders an election to choose between cash and stock, often with proration mechanisms to maintain the desired overall mix. The cash component in a mixed deal is generally taxable while the stock portion may qualify for tax deferral.

From the seller's perspective, stock deals are preferred when shareholders want to defer capital gains taxes and maintain exposure to the combined entity. From the buyer's perspective, the choice depends on relative share price valuation, available cash and debt capacity, and the impact on credit metrics. If the acquirer believes its stock is overvalued, a stock deal effectively lets it buy the target at a discount. If the acquirer believes its stock is undervalued, a cash deal avoids giving away cheap shares.