Some stupid question came up to my mind while I was reading M&A material. When acquiring company pays target shareholders with its own stock, it has to issue new stock. OK I understand, but what I don’t get is WHO pays, who gives acquiring company money for new shares and why? That new shares go to target shareholders instead of cash, so where is this new money coming from???
Isn’t it like the government just printing money - doesn’t it dilute the value of the current shares, which is apparant from the drop in stock price after most M&A announcements are made? Just thinking outloud - haven’t gotten to this section yet.
To answer both posts: If target is acquired with stock, there is no cash changing hands. For example, Bank of America acquired Merrill Lynch with stock, so former ML shareholders now have shares in the big BoA/ML conglomerate. If the value of ML acquired is the same per share paid as vlaue of BofA before acquisition, there is no dilution necessarily because old Bof A shareholders may own a smaller percentage, but the combined company is bigger. Hope this makes sense
You didn’t answer my question: What happens when acquiring firm issues NEW shares to buy target company? Who pays for them, because I don’t think that they simply print out 1 million new shares???
They simply print out 1M new share. That’s it. For example, company A buy company B, suppose company B has 1M cash as asset and nothing else, it would be 1M asset and 1M SE. Company A will issue new shares worth 1M, then A’s asset and equity will increase by 1M after combination. In reality, there are goodwill involved so normally buyers’s share will be diluted somewhat and the risk to integration so the buyer’s stock will drop after the news.
The shareholders of the target company pay for them. The currency that they use is the stock in the target company, which gives the acquiring firm ownership of the target company’s assets. *The acquiring firm issues new stock and receives target firm’s assets & liabilities in exchange. *The target firm’s shareholders receive the acquiring firm’s stock and pay for it with their existing target firm’s stock. The terms at which this all happens, depends on agreements about the target and acquiring firm’s respective stock values.
New shares are given for the net worth of the target, there is no cash involvement. Then the assets & liabilities of the target will become the assets & liabilities of the acquirer. So, its just the exchange of A/L of the target for the new shares of the acquirer