Roadmap

Paying & Financing an Acquisition

1. Common forms of Payment and selected Implications
   1. Cash & Stock Payment
   2. Collar Arrangement & EPS Dilution
2. Sources and Selected Strategies of Financing
   1. Leveraged Buyout
   2. Private Equity

Learning Objectives

Paying & Financing an Acquisition

Relevant Course Learning Objectives

Paying & Financing an Acquisition

Start

M&A transactions typically are paid with cash, equity, debt, or some combination, with financing sources ranging from cash on hand to commercial banks to seller financing. Highly leveraged transactions (LBOs), often are structured by financial sponsors such as private equity firms, hedge funds, and venture capitalists.

DePamphilis (2025) Financing the Deal

Payment vs. Transaction

Going Back

? What is the difference between the “form of payment” and “form of transaction” (i.e., our framework from the intro-session)?

Payment vs. Transaction

Going Back

Notes

• Form of payment refers to the type of compensation given target shareholders and may include cash, debt, stock, or some combination of all three.

• The form of transaction refers to what is being purchased (e.g., assets or shares) and how ownership is transferred.

• The form of payment and the form of transaction are essential elements of deal structuring: choices made in one area affect other areas.

Lifecycle of Complex Deals

Going Back

Why are payment and financing key to deal structuring?

\(\Rightarrow\) understand implications from different structures

How to Pay for an Acquisition?

Payment

Cash

• Characteristics: immediate liquidity, clear valuation
• Advantages: certainty, simplicity, immediate exit for target shareholders
• Disadvantages: sufficient cash needed, tax implications for target shareholders

How to Pay for an Acquisition?

Payment

Stock

• Characteristics: acquirer issues shares to target shareholders
• Advantages: conservation of cash, risk-sharing, maybe tax advantages
• Disadvantages: dilution, complex valuation, target shareholders exposed to post-deal performance

How to Pay for an Acquisition?

Payment

Stock

• Acquirer issues new shares

• Share Exchange Ratio: (SER) number of shares the acquirer issues for each share of the target

• SER = Offer Price Per (Target) Share / Acquirer Share Price = OPPS/ASP

• New shares issued (target shares outstanding \(\times\) SER) are allocated to the target company’s shareholders

• Total number of outstanding shares increases, so pre-acquisition shareholders own a smaller percentage of the acquirer

Share Exchange Ratio

Stock Payment

Example

Acquirer A agrees with shareholders of target B on a stock-paid acquisition of 100% of the shares of B by A. A offers to exchange (for each share of B) USD 47 worth of A’s stock whose market value is USD 108. Assume that A has 500 outstanding shares and B has 324.

Share Exchange Ratio & Implications for Shareholders?

Share Exchange Ratio

Stock Payment

Example

• Share Exchange Ratio = Offer Price Per (Target) Share / Acquirer Share Price = OPPS/ASP \(= 47/108 = .4352\)

• For every share of the target B that a shareholder of B owns, she would receive 0.4352 shares of the acquirer A

• New shares issued = pre-acquisition target shares outstanding \(\times\) SER = \(324 \times .4352 \approx 141\)

• Total number of post-acquisition shares of A: \(500 + 141 = 641\)

• A’s pre-acquisition shareholders’ post-acquisition ownership: \(500/641 \approx 78\%\)

Share Exchange Ratio

Stock Payment

Exercise

Acquirer A agrees with shareholders of target B on a stock-paid acquisition of 100% of the shares of B by A. A offers to exchange (for each share of B) USD 62 worth of A’s stock whose market value is USD 95. Assume that A has 330 outstanding shares and B has 480.

Share Exchange Ratio & Implications for Shareholders?

→ Menti

Share Exchange Ratio

Stock Payment

Notes

• SER = OPPS/ASP \(= 62/95 = .6526\)

• For every share of the target B that a shareholder of B owns, she would receive 0.6526 shares of the acquirer A

• New shares issued = pre-acquisition target shares outstanding \(\times\) SER = \(480 \times .6526 \approx 313\)

• Total number of post-acquisition shares of A: \(330 + 313 = 643\)

• A’s pre-acquisition shareholders’ post-acquisition ownership: \(330/643 \approx 51\%\)

Stock vs. Cash Payment: Implications?

Koller, Goedhart, and Wessels (2025) Exhibit 31.8

Case

Assume that the acquirer and the target have a market capitalization of USD 1 billion (USD 10 \(\times\) 100m shares) and USD 500 million (USD 5 \(\times\) 100m shares), respectively. The acquirer pays a total price of USD 650 million, including a premium of 30 percent. […]

a) SER & Ownership Ratio if payment was in stock?

SER & Ownership Ratio

Case Study

• SER = OPPS/ASP \(= 6.5/10 = .65\)

• Total number of post-acquisition shares: \(100m + 65m = 165m\)

• Ownership share of target shareholders \(65/165 \approx 39.4\%\)

Stock vs. Cash Payment

Case Study

Case cont’d

Assume 2 scenarios: “(1) a downside scenario in which the value of operating improvements is USD 50 million lower than the premium paid, and (2) an upside scenario in which the value of these improvements is USD 50 million higher than the premium. […]”

b. What if payment was in cash?

• When is acquirer value created/destroyed?

• Who does not bear the risk of value destruction?

What if Payment in Cash?

What if Payment in Cash?

Case Study

Value Creation/Destruction

• Target shareholders receive guaranteed USD 650 million regardless of post-deal performance: shielded from implementation risk

• Acquirer shareholders bear entire transaction risk, with stake value changing USD 50 million up/down based on acquisition outcomes

• Cash payment creates asymmetric risk distribution: target shareholders get certainty while acquirer shareholders assume full responsibility for success/failure

c. What if payment was in stock?

What if Payment in Cash?

Case Study

Notes in Koller, Goedhart, and Wessels (2025)

“If the payment is entirely in cash, the target’s shareholders get USD 650 million, regardless of whether the improvements are high enough to justify the premium. These shareholders do not share in the implementation risk. The acquirer’s shareholders see the value of their stake increase by USD 50 million in the upside case and decrease by the same amount in the downside case. They carry the full risk.”

Payment in Stock

Payment in Stock

Case Study

Value Creation/Destruction

• Target shareholders participate in implementation, receiving USD 670m in upside scenarios vs USD 650m cash payment

• Acquirer shareholders gain downside protection as target shareholders absorb part of poor outcomes (USD 630m vs USD 650m cash)

• Stock payment creates risk-sharing alignment while target shareholders still receive premium over pre-deal value

Payment in Stock

Case Study

Notes in Koller, Goedhart, and Wessels (2025)

“Next, consider the same transaction paid for in shares. The target’s shareholders participate in the implementation risk by virtue of being shareholders in the new combined entity. In the upside case, their payout from the acquisition increases as improvements increase: they receive USD 670 million in value, as opposed to USD 650 million. Effectively, even more value has been transferred from the acquirer’s shareholders to the target’s shareholders. The acquirer’s shareholders are willing to allow this form of payment, however, because they are protected if implementation goes poorly. If the deal destroys value, the target’s shareholders now get less than before, but still a nice premium, since their portion of the combined company is worth USD 630 million, compared with the USD 500 million market value before the deal.”

Stock vs. Cash Payment: Implications?

Payment

“Assuming that the acquirer is not capital constrained, the real issue is whether the risks and rewards of the deal should be shared with the target’s shareholders.”

Koller, Goedhart, and Wessels (2025) (Ch. 31)

\(\Rightarrow\) let’s apply these insights to the GameStop-eBay case

GameStop-eBay Case

Mixed Payment in Practice

What Does the Payment Design Imply?

GameStop-eBay Case

What Does the Payment Design Imply?

GameStop-eBay Case

Tasks

1. Compute SER & new shares issued to eBay shareholders
2. Compute post-deal ownership shares (legacy GameStop vs. eBay shareholders)
3. Relate your result back to (mixed) payment, dilution, and risk sharing

Assumptions:

• GameStop ASP = USD 25
• eBay shares outstanding = 445 million
• GameStop shares outstanding = 445 million

SER and New Shares Issued

GameStop-eBay Case

The stock portion of the offer gives each eBay share a stock value of USD 62.50. The implied SER is:

\[ SER = \frac{OPPS_{\text{stock}}}{ASP} = \frac{62.50}{25} = 2.50 \]

Each eBay share would be exchanged for 2.50 GameStop shares under the stock leg. New shares issued to eBay shareholders:

\[ N = 445\text{m} \times 2.50 = 1{,}112.5\text{m} \]

Interim takeaway \(\rightarrow\) under a fixed-value stock leg, a low bidder share price mechanically implies a high SER and therefore substantial share issuance

Post-Deal Ownership

GameStop-eBay Case

Total post-deal shares equal legacy GameStop shares plus newly issued shares:

\[ Shares_{post} = Shares_{GME,pre} + N = 445 + 1{,}112.5 = 1{,}557.5\text{m} \]

Ownership shares after the transaction would therefore be:

\[ Ownership_{\, \text{Legacy eBay}} = \frac{1{,}112.5}{1{,}557.5} \approx 71.43\% \]

\[ Ownership_{\, \text{Legacy GME}} = \frac{445}{1{,}557.5} \approx 28.57\% \]

Interpretation & Implications

GameStop-eBay Case

EPS Dilution

Accounting Implications

EPS Dilution

Accounting Implications

P/E Ratios of Acquirer and Target

EPS Dilution // EPS Accretion

Example

P/E Ratios of Acquirer and Target

EPS Dilution // EPS Accretion

Example cont’d

\[ SER = OPPS/ASP = 100/66 \approx 1.515 \]

• New Shares Issued = 100 \(\times\) 1.515 = 151.5

• Total Shares Post-Acquisition = 100 + 151.5 = 251.5

• EPS Combined: (330 + 330) / 251.5

\(\Rightarrow\) EPS diluted from 3.3 to 2.624

\(\Rightarrow\) Dilution occurs because the target’s P/E is higher than the acquirer’s P/E

P/E Ratios of Acquirer and Target

EPS Dilution // EPS Accretion

Example Alternative

• Assume: change OPPS from 100 to 39.6

• P/E of target = 39.6 / 3.3 = 12

• EPS target = 3.3

• New Shares Issued = 100 \(\times\) (39.6/66) = 60

• Total Shares Post-Acquisition = 100 + 60 = 160

• EPS Combined: (330 + 330) / 160 = 4.125

\(\Rightarrow\) EPS accretive from 3.3 to 4.125

\(\Rightarrow\) Accretion occurs because the target’s P/E is lower than the acquirer’s P/E

Cash or Stock?

Payment Implications

Payment as a Contract

Collar Arrangements

Payment in Stock

Stock Payment: Fluctuations

Subsequent fluctuations in the acquirer’s stock price can pose a threat of termination before closing, which is why parties implement collars around fixed share exchange or fixed-value agreements to share the risk or benefit from market fluctuations.

Why threat? How to share this risk?

Collar Arrangements

Payment in Stock

Threat from Market Fluctuations?

Common Arrangements at Signing

• Fixed Share Exchange: precludes any changes in the number of acquirer shares exchanged for each target share (fix SER)

• Fixed Value Exchange: fixes the value of the offer price per share by allowing the share-exchange ratio to vary (fix OPPS)

Situation at Closing

→ fixed share exchange/value exchange agreed at signing can be affected by market developments until closing

Collar Arrangements

Payment in Stock

Collar Arrangements

Payment in Stock

Collar Arrangements

Payment Implications

\[ OPPS = SER \times ASP \]

with collar: \[ SER_L \times ASP_L \leq OPPS \leq SER_U \times ASP_U \]

where

• L/U Lower/Upper Limit

• OPPS Offer Price per Share

• SER Share Exchange Ratio

• ASP Acquirer’s Share Price

Collar Arrangements

Payment Implications

Example

A target agrees to a USD 50 purchase price based on a share exchange ratio of 1.25 acquirer shares for each target share. The value of the acquirer share at the time of the agreement is USD 40 per share. Target shareholders are guaranteed to receive USD 50 per share as long as the acquirer’s share price stays within a range of USD 35 to USD 45 per share. The share exchange ratio floats within the USD 35 to USD 45 range in order to maintain the USD 50 purchase price.

- Fixed Value or Fixed Share Exchange?

- What’s the collar range of the share exchange ratio?

Collar Arrangements

Payment Implications

Example

\[ \begin{aligned} SER_L \times ASP_L \leq OPPS \leq SER_U \times ASP_U \\ \\ (50/35) \times 35 \leq (50/40) \times 40 \leq (50/45) \times 45 \\ \\ 1.4286 \times 35 \leq 1.25 \times 40 \leq 1.1111 \times 45 \\ \\ \end{aligned} \]

• Fixed Value: purchase price is fixed by allowing the share exchange rate to vary

• Gives seller some certainty inside a narrow range within which the acquirer share price floats

Collar Arrangements

Case Study from DePamphilis (2025)

Facts

On 9/5/2009, Flextronics agreed to acquire IDW with stock payment and an aggregate value of approximately USD 300 million. The share exchange ratio used at closing was calculated using the Flextronics average daily closing share price for the 20 trading days ending on the fifth trading day immediately preceding the closing.

Collar Arrangements

Case Study from DePamphilis (2025)

Transaction terms identified the following three collars:

1. Fixed Value (SER floats-offer price fixed within a range): Offer price was calculated using an exchange ratio floating inside a 10% collar above and below a Flextronics (acquirer) share price of USD 11.73 (i.e., from USD 10.55 to 12.90) and a fixed purchase (offer) price of USD 6.55 per share for each share of IDW (target) common stock.

In which range does the exchange ratio float?

Collar Arrangements

Case Study from DePamphilis (2025)

SER Float \[ SER_L \times ASP_L \leq OPPS \leq SER_U \times ASP_U \] \[ (6.55/10.55) \times 10.55 \leq (6.55/11.73) \times 11.73 \leq (6.55/12.90) \times 12.90 \]

\[ .6209 \times 10.55 \leq .5584 \times 11.73 \leq .5078 \times 12.90 \]

SER Float

# Define the parameters
min_price <- 10.55
mid_price <- 11.73
max_price <- 12.90
offer_price <- 6.55

# Generate a sequence of acquirer share prices within the collar range
price_seq <- seq(from = min_price, to = max_price, length.out = 100)

# Compute the exchange ratio for each acquirer share price
df <- data.frame(
  acquirer_price = price_seq,
  exchange_ratio = offer_price / price_seq
)

Collar Arrangements

Case Study from DePamphilis (2025)

Transaction terms identified the following three collars:

2. Fixed Share Exchange (SER fixed-offer price floats within a range): Offer price is calculated using a fixed exchange ratio inside a collar from 11% to 15% above and below USD 11.73, resulting in a floating purchase (offer) price if the average Flextronics stock price increases or decreases by between 11% and 15% from USD 11.73 per share.

• Fixed Value Agreement for +/- 10% ASP fluctuation (see before)

• Fixed Share Exchange for [11;15]% ASP fluctuation (…)

Collar Arrangements

Case Study from DePamphilis (2025)

Transaction terms identified the following three collars:

3. The target, IDW, has the right to terminate the agreement if Flextronics’ share price falls by more than 15% below USD 11.73. If Flextronics’ share price increases by more than 15% above USD 11.73, the exchange ratio floats based on a fixed purchase (offer) price of USD 6.85 per share.
   

• Fixed Share Exchange for [11;15]% ASP fluctuation +

  • Above 15% increase in ASP: OPPS capped at USD 6.85

  • “Free fall” of ASP: IDW may terminate

OPPS Float

mid_price <- 11.73
offer_price_base <- 6.55  # fixed exchange ratio base offer price
offer_price_cap <- 6.85   # capped offer price above upper threshold
#
# Calculate collar thresholds
lower_threshold <- mid_price * (1 - 0.15)
lower_mid_threshold <- mid_price * (1 - 0.10)
upper_mid_threshold <- mid_price * (1 + 0.10)
upper_threshold <- mid_price * (1 + 0.15)
#
# Generate a sequence of acquirer share prices from just below lower to above upper
# Calculate range as percentages around mid_price
min_percent <- -0.20  # 20% below mid_price
max_percent <- 0.20   # 20% above mid_price
#
# Generate sequence based on percentage changes from mid_price
aps_seq <- seq(
    from = mid_price * (1 + min_percent),
    to = mid_price * (1 + max_percent),
    length.out = 200
)
#
# Compute offer price per share for each APS
offer_price <- sapply(aps_seq, function(price) {
  if (price < lower_threshold) {
    return(0)  # agreement can be terminated
  } else if (price >= lower_mid_threshold && price <= upper_mid_threshold) {
    return(offer_price_base)  # fixed exchange ratio base offer price
  } else if (price > upper_mid_threshold && price <= upper_threshold) {
    return(offer_price_base/upper_mid_threshold * price)  # floating offer price with fixed exchange ratio
  } else if (price >= lower_threshold && price < lower_mid_threshold) {
    return(offer_price_base/lower_mid_threshold * price)
  } else if (price > upper_threshold) {
    return(offer_price_cap)  # capped offer price
  } else {
    return(NA)  # capped purchase price
  }
})
#
df <- data.frame(
  APS = aps_seq,
  OfferPrice = offer_price
)

Strategy?

Research on Stock-Paid Acquisitions

“We find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short-lived run-up in bidders’ stock prices during the period when the stock exchange ratio is determined, which substantially impacts the takeover price.”

Ahern and Sosyura (2014)

Key Takeaways

Payment

Thank You!

Copyright

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