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investors may anticipate this and view the stock acquisition as a signal that the acquirer‟s shares
are overpriced.
3. Taxes: In a cash deal, the target firm‟s shareholders will owe capital gain taxes on the
proceeds. Exchanging shares means the transaction is tax-free (at least until the target firm
stockholders choose to sell their newly acquired shares of the bidder). Taxes may be an important
consideration in deals where the target is private or has a few large shareholders, as Example 6
makes clear.
Exhibit 17.8 Criteria for analyzing a potential acquisition.
Source: Adapted from Coyle (2000, 32).
Chrysler Corporation stockholders, in contrast, saw the postmerger value of the Daimler-Benz shares
they received fall by 60%.
Often firms will make offers using a combination of stock and cash. In a 2001 study of U.S.
mergers between 1973 and 1998, only 35.4% of the deals were cash-only. Stock-only (45.6%) and
combination cash and stock (19%) accounted for approximately two-thirds of the deals. 15 This
contrasts with the 1980s when many deals were cash offers financed by the issuance of junk bonds.
The acquirer‟s financial adviser or investment banker can help sort through these factors to maximize
the gains to shareholders.
Example 6: Sarni Inc. began operations 10 years ago as an excavating company. Jack Sarni, the
principal and sole shareholder, purchased equipment (a truck and bulldozer) at that time for $40,000.
The equipment had a six-year useful life and has been depreciated to a book value of zero. However,
the machinery has been well maintained and because of inflation has a current market value of
$90,000. The business has no other assets and no debt.
Pave-Rite Inc. makes an offer to acquire Sarni for $90,000. If the deal is a cash deal, Jack Sarni will
immediately owe tax on $50,000, the difference between the $90,000 he receives and his initial
investment of $40,000. If he instead accepts shares of Pave-Rite Inc. worth $90,000 in a tax-free