Skip to content
Scrim
Learn/M&A & Merger Modeling/Module 2
2.2·7 min read

Cash vs. Stock

Cash is usually funded with new debt; stock issues new buyer shares. The mix drives both interest expense and dilution.

By the end you can
  • ✓Explain the trade-offs of cash vs. stock
  • ✓Compute new shares issued in a stock deal
Cash (usually new debt)
  • ›Adds interest expense
  • ›No new shares - less EPS
  • ›More when debt is cheap
  • ›Raises leverage and risk
Stock (new buyer shares)
  • ›No interest cost
  • ›Issues shares - spreads EPS thinner
  • ›Shares the deal risk with the target
  • ›More when the buyer's stock is richly valued
New Shares Issued=Stock ConsiderationBuyer Share Price\text{New Shares Issued} = \frac{\text{Stock Consideration}}{\text{Buyer Share Price}}
Each new share dilutes EPS, so this number flows straight into pro forma shares.
Worked example · A 50/50 deal
Given
  • •: $4.0B
  • •Funded 50% stock, 50% cash (new debt)
  • •Buyer share price: $40.00
  • •Debt rate: 5%
Solution
  1. 1.
    50%×4,000=$2,000M50\% \times 4{,}000 = \$2{,}000\text{M}
  2. 2.New shares issued
    2,000/40.00=50M shares2{,}000 / 40.00 = 50\text{M shares}
  3. 3.New debt
    50%×4,000=$2,000M50\% \times 4{,}000 = \$2{,}000\text{M}
  4. 4.Annual interest
    5%×2,000=$100M5\% \times 2{,}000 = \$100\text{M}
Answer

The deal issues 50M new shares and adds $100M of annual interest. Both will pull on in Module 4.

Check yourself

The stock portion of a deal is $1,200M and the buyer's share price is $30. New shares issued:

← Previous · 2.1
Offer Price & Control Premium
Next · 2.3 →
Sources & Uses