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., own equity).
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 all-stock method.
Generally, the method of payment selected by an acquirer provide 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. At the same time, if an acquirer strongly believes that it would be able to realize the synergy potential of the deal, it would prefer an all-cash payment to reap all future benefits.
Nowadays, mixed offerings are a prevalent payment method in M&A deals. For major deals, it is probably the only available type of payment. The popularity of the mixed offering method can be explained by its flexibility. An acquirer who finances the deal using mixed offering may experience the benefits of both cash and stock payment at the same time.
Factors Affecting the M&A Payment Method Selection
An M&A transaction is a sophisticated process whose ultimate success depends on many factors. Due to such reasons, the selection of the payment method appropriate for the transaction is not straightforward as it seems. Generally, the selection process involves the consideration of various factors. Since the mixed offering is a payment method that combines both cash and stock payments, the following factors can affect the optimal mix of the 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.
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 consist mostly of cash that does not affect the ownership stake.
3. Corporate governance
Similar to the ownership considerations, the type of payment also influences corporate governance. An acquirer that is not willing to significantly change its corporate governance would prefer a larger portion of cash over stock in its mixed offering.
4. Free cash flows
Essentially, free cash flows indicate the availability of cash within a company. Thus, acquirers that are without substantial cash flows will likely put more weight on the equity part in the mixed offerings.
5. Business cycle of the target company
The stage of development of the target company can also affect the mix of cash and equity in the mixed offering.
6. Tax considerations
The cash payment in an M&A transaction increases the total acquisition costs for an acquirer due to the immediate tax payments. The taxes due can add to the acquirer’s existing tax liabilities.
Examples of Mixed Offering
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 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 equity acquisition exceeded $85 billion. The deal is an example of a mixed offering because AT&T used the combination of cash and stock payments.
According to the terms of the deal, the shareholders of Time Warner received $107.50 per share. Half of this price ($53.75) was paid in cash, while another half was paid in AT&T stock, with the price per share at $53.75.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: