M&A deal structuring: All cash or stock or seller financing

Recently my colleague and I were discussing the impact of the deal structuring on the valuation of the target company (from the eyes of the acquirer and its shareholders). Few of the points discussed here are as follows:
1. Any investment (Greenfield/brown-field/acquisition) should be aimed towards creating the highest NPV for the company. Also if the deal is profitable, then rarely do firms have issues in tapping the capital market. Hence structuring has only a marginal impact.
2. A company which is not excessively levered (manufacturing firms with huge debts) or is a bank with minimum capital requirements should always go for all cash deal rather than a stock deal. This is because of following reasons:
a. If the company has huge stockpiles of cash/cash equivalents, then most likely this money is earning a miniscule LIBOR rate and any wise business investments should beat this return by a huge margin. (low opportunity cost)
b. If the company does not have too much capital, then cash deal will force them to borrow and debt servicing often improves the financial prudence of the target.
c. I believe a bird in hand is better than 2 in the bush. A company should either return the surplus to the shareholders as dividends or it should invest. Otherwise management forgets its fiduciary duties and tends to squander away the money through pvt. Jets.
d. Also it puts a cap on the size of acquisitions and its frequency. Thereby minimizing the risk taken by share holders.
3. Seller financing is very common when a PE or financial firm is selling the asset. This involves the seller to fund the acquisition by loaning part of the proceeds (sometimes working capital/corporate debt to run the firm too). The only question one needs to ask themselves why was the seller in such a hurry to offload the asset that it did not even stop to collect the cheque? Any FCFE computation would look very rosy because of the reduced capital requirements, but one should not under estimate the risks.
4. Unless there is a severe liquidity crunch, share dilution rarely works in the benefit for the existing share holders. Lesser the mouths to feed, the more for me.
5. Not to mention that stock deal means 100% financing through equity. Since equity is more expensive then debt/free cash, unless the stock is over-priced it rarely makes a good business case.
6. Also because of the exit restrictions stock deal don’t have an earnout components (or have smaller mgmt retention bonus). Hence acquirer takes in more risks than the conventional deals.
7. EPS bump: A lot of firms trading at very high PE ratio believe that by acquiring another company trading at a much lower PE ratio, they increase the EPS of their company and hence create share holder wealth. But the challenge remains in convincing the investors that the bigger elephant will continue to grow at the same rate.

life Travel

Visiting Maldives – Diving a.k.a. Evolution was a Waste

I had the opportunity to go to my first pleasure-trip abroad recently. Since I had never done anything which is considered exciting or cool, so to say, and basically wanted to brag about something (like I am doing now), I decided to go for diving in Male, Maldives. Now, as most things I do in my life, I do not have a convincing answer to the question why a portly fellow like myself wanted to dive, except that I really wanted to. Also, after four days of thorough enjoyment and merry making, I am now an international, lifetime licensed scuba-diver, verified by P.A.D.I.!

Diving is a costly affair – no second thoughts on that, but the experience is totally worth it, especially if you get a license like I did. In the words of a cheap person (yours truly) – it is worth every single paisa. The instructors and diving buddies at Male are amazing. They are very friendly and adjusting so that you overcome every fear and boldly dive down, safe and amazed.

To earn my license, I completed a series of tests, a bit theoretical and a lot underwater. It included taking out my breathing regulator deep down and after a short while, retrieving and reusing it. At one point I had to stay still for a minute at a given depth without bobbing up or down. During this exercise, I was cross-legged, holding my fins (still on) with my hands, looking like an underwater ascetic of sorts. I took a total of six dives, including instructional and those for pure pleasure. Anyone who has dived in Male will know these areas – Maagiri, Bandos Reef, Coral Garden, Manta Point and Fish Tank.

And now, on to what I experienced. Although all the amazing witnessing I did was at very close distance, I obeyed the instruction of “looking, no touching”. We always started our dives near coral reefs, which are complex and delicate ecosystems, and they contain schools of fishes and a few mean-tempered Murray Eels. Schools of different fishes roamed around us like I had seen in the videos of divers on TV. I saw three Black-tip Reef Shark in different dives; the last sighting was at a distance of three feet. As my instructor had pointed out, they were harmless. I was fortunate enough to witness 8-10 Sting Rays up close. In one of the instructional dives, I saw four Napoleon Wrasse together. I wasn’t aware of their existence and their size startled me so much I nearly soiled myself. I saw a Sturgeon fish and at one point, four Maldives Anemone fish (NEMO!!). I could even take a video of a school of 30-40 dolphins who crossed paths with our boat one day. Even HD versions of Discovery, NGC and the rest can’t compare to the four days I lived there.

I had a ball of a time. I spend over three hours and twenty seven minutes being forty feet underwater. Here is what I have concluded about life after this euphoric experience – Coming out of water to evolve into land dwellers was a waste. It is so amazing underwater and I was so comfortable that I never wanted to end any of my dives.