What is a Mixed Offering?
In merger and acquisition transactions, a mixed offering (also known as a mixed payment) is a form of payment in which an acquirer uses a combination of cash and non-cash payment methods (e.g., equity) to fund the purchase of the target company.
For example, an acquiring company employs a mixed offering if a portion of the deal is paid using cash while the rest is paid through a stock-for-stock exchange. A stock-for-stock exchange is a form of payment in which an acquirer exchanges its own shares for the shares of a target company at a predetermined rate.
Types of Payment Methods
A mixed offering is one of three payment methods in mergers and acquisitions. The other two payment methods are the all-cash method and the all-stock method.
The method of payment selected by an acquirer often provides some valuable insights regarding the acquirer’s perception about the ability to realize synergies from the upcoming deal or about the value of its own equity. For example, if an acquirer believes that its own equity is overvalued, it would likely prefer an all-stock payment. If the acquirer strongly believes that it will be able to realize significant synergy potential from the deal, it would prefer an all-cash payment, so as to put itself in the best position to reap all future benefits.
Nowadays, mixed offerings are a prevalent payment method in M&A deals. For major deals, it is often the only realistically available type of payment. The popularity of the mixed offering method can also partly be explained by the flexibility it offers the acquirer.
Factors Affecting the M&A Payment Method Selection
An M&A transaction is a sophisticated process, whose ultimate success depends on many factors. The selection of the payment method most appropriate for the transaction is not always as straightforward as it seems. Generally, the selection process involves the consideration of various factors. The following factors can affect the optimal mix of payment methods:
1. Size of the deal
The bigger the deal, the higher the possibility that an acquirer will employ more stocks than cash in their payment. This is to protect their cash flow, which a large cash outlay all at once might threaten. Using stocks for part of the payment may also mean that the acquirer does not have to increase its debt in order to finalize the deal.
2. Ownership considerations
The key disadvantage of using equity as a payment method is the dilution of ownership. If an acquirer does not want to affect the ownership structure significantly, the mixed offering will likely consist mostly of cash, as cash payments do not affect the equity ownership stake.
3. Corporate governance
The type of payment may also be influenced by corporate governance considerations. An acquirer who is not willing to significantly change its corporate governance would prefer a larger portion of cash rather than stock in its mixed offering.
4. Free cash flows
Essentially, free cash flows indicate the availability of cash within a company. Thus, acquirers who are without substantial cash flows will likely put more weight on the equity part of a mixed offering.
5. Tax considerations
The cash payment in an M&A transaction increases the total acquisition costs for an acquirer, due to the immediate tax payments that must be paid by the target company. The taxes due can add to the acquirer’s existing tax liabilities.
Examples of Mixed Offerings
Example 1: Acquisition of WhatsApp by Facebook
In February 2014, Facebook Inc. announced the acquisition of WhatsApp, a cross-platform mobile messaging company. The total value of this acquisition was around $19 billion. Facebook executed the deal using a mixed offering payment method. The social media giant acquired all outstanding shares and options of WhatsApp in exchange for $4 billion in cash and $12 billion worth of Facebook Class A shares. Additionally, Facebook granted $3 billion in restricted stock units to the employees of WhatsApp.
Example 2: Acquisition of Time Warner by AT&T
In October 2016, AT&T Inc., the US telecommunications and entertainment conglomerate, announced the acquisition of Time Warner, a multinational mass media and entertainment conglomerate. The total value of the acquisition exceeded $85 billion. AT&T used a combination of cash and stock payments.
According to the terms of the deal, the shareholders of Time Warner received $107.50 per share for their stock. Half of this price ($53.75) was paid in cash, while the other half was paid in AT&T stock, with the price per share at $53.75.
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