Cash Deal or Stock Deal in Acquisition Method

This is question #101 from Schweser Vol 1 Exam 3 PM.

Alertron is considering making an offer to acquire Carideo. Ozer, and the rest of the executive management team at Alertron, is extremely confident in the $600 million dollar estimate of cost reduction synergies that are likely to result from the merger and feel that the estimate may actually be conservative. However, when analysts at Carideo review the figures, they have a much different opinion and are less certain that $600 million worth of synergies could be realized. While Carideo believes the net present value of synergies from the deal would still be positive, its estimates are much lower than Alertron’s.

Based on each firm’s forecasts of the estimated NPV of synergies from a merger between Alertron and Carideo, what payment method is each firm likely to prefer in the deal?

  • A. Both firms prefer a cash deal
  • B. Only Alertron prefers a cash deal
  • C. Only Carideo prefers a cash deal

I answered C, but the correct answer was A. Can anyone explain to me why the acquirer would prefer cash deal and not stock deal in this case?

When the acquirer expects significant synergies to accrue, they prefer to keep those synergies for themselves.