Acquisition Bid Price: Is There an Optimal Cash-Equity Payment Mix?

Abstract

This paper looks at the combination of cash and share payment in takeovers, particularly in analyzing the condition of its optimal mix setting. This problem develops in a context of asymmetry of information for the buyer has lower information on the target firm than the sellers. But the bidder has superior information on the true economic value of his own shares. In fact, a double asymmetry of information develops between both parties. The setup of the paper is to design the optimal payment mix considering payment with shares as insurance for the buyer against a risk in information, although at the same time new shares will entail dilution. That cash-shares mix is an element of the process which helps disclosing pieces of private information on the economic perspectives of the newly merged firms.

We show that a payment scheme mixing cash and shares explains itself outside a pure strategic game aiming at discouraging competitors. The setting of common conditions of payment is part of the takeover transaction process. The optimal means of payment will be directly influenced by the correlation between the expected acquisition gains at the target and at the acquiring firm levels. This correlation will characterize strategies spanning from pure diversification of economic activities to business integration.

A process of negotiation does not mean equally and symmetrically shared information, but that biases are limited. Exaggeration biases exist and are part of communication policy from one party to the other. That communication policy gains importance in a situation of negotiation of the means of payment or when the terms of payment are publicly revised in a mixed takeover offer. It also appeared that the final takeover price should be sensitive to the design of the scheme of payment.

Keywords: mergers and acquisitions, financing decision, information asymmetry, means of payment, control

JEL Classification: G3, G34