Replies to post #171728 on 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.

[DewDiligence]

[Quiz]—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 addition to the issue you’re thinking off regarding stocks options, there’s anther reason acquiring companies generally prefer cash deals: The buyout price in a cash deal can generally be slightly lower than in a stock deal because shareholders of the acquired company don’t have to be given extra compensation for incurring the risk of a decline in the acquiring company’s share price via a larger premium or a deal structured with collars.