Stock and cash transactions
Stock for stock transactions is whereby, in the mergers and acquisitions context, the acquiring company’s stock is exchanged with that of acquired company at a predetermined rate (Hu, 2014). However, only part of the merger is completed with this kind of transaction with the rest being paid inform of cash. On the other hand, cash for stock transactions happen when during merging, the acquiring company buys the targeted firm’s stock by cash.
One of the advantages of these transactions to the acquired company is that no burden during merging because not all expenses are paid inform of stock. Only part of it is paid by stock with the rest being completed by cash payments. Secondly, stock for stock options grants employees stock option awards by allowing them to pay for only option price which is then refunded to employees after which they don’t pay anything. Both transactions result to diversification. This reduces chances of slump in sales because a fall in sales of one company is offset by increase in sales of the other company (Floros & Salvador, 2014). Cash and stock transactions of companies within the same industry reduces competition which in turn minimizes expenditure on advertisement resulting to production of high quality products (Abel et al, 2013). Finally, cash for stock and stock for stock transactions result to mergers that in turn help to regulate monopoly.
Cash and stock transactions however, are accompanied by some challenges. For instance, the non-employee shareholders complain that stock for stock transactions add expenses to the company as the grantees end up not meeting their payments of the option prices. Secondly, reload option, which is paid to employees upon the exercise of other options is claimed to be a new option that has value (Abel et al, 2013). It adds to the expense of a company. Thirdly, stock options awarded to employees inform of grants to help employees purchase shares from the company are only validated after an employee has worked with the company for quite some time. So, new employees are exclusives of this award. Finally and more precisely, in the case of cash for stock transactions, the acquiring company risks entirely on the expected synergy value embedded, that it will not materialize.
References
Abel, A. B., Eberly, J. C., & Panageas, S. (2013). Optimal inattention to the stock market with information costs and transactions costs. Econometrica, 81(4), 1455-1481.
Floros, C., & Salvador, E. (2014). Calendar anomalies in cash and stock index futures: International evidence. Economic Modelling, 37, 216-223.
Hu, J. (2014). Does option trading convey stock price information? Journal of Financial Economics, 111(3), 625-645.