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o the United States.Unlike most earlier studies, our primary focus is on the relative importance ofthreats to bidder corporate control and to its financial strength when choosingthe form of M&A consideration. In making an M&A currency decision, a bidderis faced with a choice between using cash and stock as deal consideration,which have conflicting effects. Given that most bidders have limited cash andliquid assets, cash offers generally require debt financing.2 As a consequence,a bidder implicitly faces a choice of debt or equity financing, which involves atradeoff between corporate control concerns of issuing equity and rising financialdistress costs of issuing debt. Thus, a bidder’s M&A currency decision canbe strongly influenced by its debt capacity and existing leverage. It can alsobe strongly influenced by management’s desire to maintain the existing corporategovernance structure. In contrast, a seller can be facedwith a tradeoffbetween the tax benefits of stock and the liquidity and risk-minimizing benefitsof cash consideration. For example, sellers may be willing to accept stock ifthey have a low tax basis in the target stock and can defer their tax liabilitiesby accepting bidder stock as payment. On the other hand, sellers can prefercash consideration to sidestep the risk of becoming a minority shareholder ina bidder with concentrated ownership, thereby avoiding the associated moralhazard problems. Unfortunately, due to data limitations, this seller tradeoff
cannot be easily measured.Looking more carefully at a bidder’s financing choice, it is clear that its corporate
governance structure can be seriously impacted by the choice of merger
currency, since stock issuance dilutes a dominant shareholder’s voting power.If preserving control is important to bidder management, then they have incentivesto select cash financing over stock financing, especially under circumstancesin which continued corporate control is threatened (e.g., see Shleifer andVishny (2003) for a discussion of control benefits). The corporate control incentives
to choose cash are likely to be strongest when a target’s share ownershipis concentrated and a bidder’s largest shareholder has an intermediate level ofvoting power in the range of 20–60%—a range where she is most vulnerableto a loss of control under a stock-financed acquisition. These incentives diminishif a bidder or target is diffusely owned, since the bidder’scontrolling blockis not threatened. On the other hand, when a shareholder has supermajorityvoting rights, stock financing is unlikely to threaten her continued control. Inthis case, any reluctance to issue stock in an acquisition is greatly weakened.
These predictions are in the spirit of the Harris and Raviv (1988) and Stulz(1988) models, which show that managers with significant ownership positions1 See the recent paper by Gadhoum, Lang, and Young (2003) for further details.
2 Debtwould dominate stock as the funding source for a cash payment given debt’s lower flotation
costs and the loss of potential tax-free capital gains treatment of the deal.Choice of Payment Method in European Mergers and Acquisitions 1347
are reluctant to seriously dilute their voting power and risk loss of control byissuing stock.Under existing theories of capital structure, debtcapacity is a positive functionof tangible assets, earnings growth, and asset diversification and a negativefunction of asset volatility (Hovakimian, Opler, and