12.2.1. Consideration Considerations
One of the decisions that the prospective buyer must make is whether it will offer to pay in cash, securities, or a combination. The prospective buyer’s choice of consideration will have multiple consequences. It will impact the transaction’s tax status and whether a vote of the buyer’s shareholders will be required. Another consequence is how much the prospective buyer will need to borrow. As previously mentioned, the buy-side adviser will frequently offer its client a financing package as an alternative to the stapled financing. Of course, the prospective buyer is also free to reject both financing packages and make arrangements of its own. Additionally, the less cash offered as consideration, the more likely the prospective buyer is to have the option of paying out of pocket, with no financing at all.
In general, using cash to acquire a company has a greater potential for a negative impact on the buyer’s credit rating than using shares. An adverse effect on the buyer’s credit rating can manifest itself as a higher cost of capital in the future; this possibility deserves careful analysis before the buyer makes a bid. As mentioned in the last chapter, investment bankers sometimes consult with credit rating agencies on a confidential basis to obtain guidance on the likely effect of a proposed transaction on the buyer’s credit rating.
Offering securities as consideration will very likely require registeri