There is risk on both sides of a transaction when a privately held company is issuing shares as a component of deal consideration. There are competing interests that can heighten the incentives for, and the likelihood of, overpayment or underpayment.
We are all familiar with the phrase “cash is king.” Why is it, though, that cash is crowned king and not real estate, bonds or LeBron James?
It all boils down to the fact that everyone can agree to the value of a dollar bill without dispute — $1 is worth $1. Someone cannot reasonably argue that a dollar bill is really worth $1.10 or 90 cents.
As a result, investors typically prefer to receive cash when selling an ownership interest in a business. It is not uncommon, however, for an acquirer to pay part of the purchase price of an acquisition with its own stock.
Click here to continue reading about the the fundamental components acquirers should consider before making a deal, in the latest issue of Crain's Dealmaker Alert.