Biotech Values

[Rocky3]

From the perspective of the acquiring company, why is a cash deal almost always economically cheaper than a stock deal at the same price?

In today's interest rate environment, the cost of borrowing the money (or income lost on using cash) is next to nothing. Assuming that the acquiree is making money (not a very valid assumption for biotech companies IMO), the acquisition will be "accretive" from an income prospective. In a stock deal, for it to be accretive, the p/e of the acquiree must be lower than that of the acquirer for it to accretive.

All that said, I tend to agree with IJ that cash is not shareholder friendly. Also, since I hate debt, I don't think it is in the acquirer's interest to leverage up in many cases. Plus, many acquirers' stock are highly priced and would be good currency.

JMO.