All-Cash, All-Stock Offer: Definition, Downsides, Alternatives

What Is an All-Cash, All-Stock Offer?

An all-cash, all-stock offer is a proposal by one company to purchase all of another company's outstanding shares from its shareholders for cash. An all-cash, all-stock offer is one method by which an acquisition can be completed. In this type of offer, one way for the acquiring company to sweeten the deal and try to get uncertain shareholders to agree to a sale is to offer a premium over the price for which the shares are presently trading.

How an All-Cash, All-Stock Offer Works

Those shareholders of the company being acquired may see prices of their shares rise, particularly if the company was bought at a premium. Even in cash transactions, a share price is negotiated for the target company, and that price could be well above where it's currently trading. As a result, shareholders of the acquired company may stand to make a sizable capital gain, especially if the combined entity is believed to be a much-improved company than before the acquisition.

For example, the acquirer may announce cost savings from the acquisition, which typically means cutting staff or redundant technology and systems. Although layoffs are bad for the employees, for the combined company, it means enhanced profit margins through lower costs. It can also mean a higher stock for shareholders of the acquired company and perhaps the acquirer as well.

Also, if the future of the company is in question or if the acquired company's stock price has been struggling, shareholders might have the opportunity to sell shares for a premium if the acquired company's stock surges on the news of the acquisition.

Where Does the Cash Come From?

The acquiring company may not have all of the cash on its balance sheet to make an all-cash, all-stock acquisition. In such a situation, a company can tap into the capital markets or creditors to raise the necessary funds.

Bond or Equity Offering

The acquiring company could issue new bonds, which are debt instruments that typically pay a fixed interest rate over the life of the bond. Investors who buy the bonds provide cash to the issuing company, and in return, the investor gets paid back the principal–or original–amount at the bond's maturity date as well as interest.

If the acquiring company wasn't a publicly traded company already, it could issue an IPO or initial public offering whereby it would issue shares of stock to investors and receive cash in return. Existing public companies could issue additional shares to raise cash for an acquisition as well.

Loan

A company could borrow via a loan from a bank or financial company. However, if interest rates are high, the debt servicing costs might be cost-prohibitive in making the acquisition. Acquisitions can run in the billions of dollars, and a loan for such a large amount would likely involve multiple banks adding to the complexity of the transaction. Also, adding that much debt onto the balance sheet of a company might prevent the newly combined company from getting approved for new loans in the future. Excess debt and the resulting interest payments might also hurt the cash flow of the new entity, preventing management from investing in new ventures and technologies that could grow earnings.

Limitations to All-Cash, All-Stock Offers

Although cash transactions can appear to be an easy, straightforward way of acquiring another company, it's not always the case. If the company being acquired has entities or is located overseas, exchange rates of the various countries involved can add to the complexity and cost of the transaction. For example, if the acquisition is due to close on a specific date and that date gets delayed–with exchange rates fluctuating daily–the conversion cost would be a different amount on the new completion date. As a result, exchange rate risk can increase the price tag of the transaction significantly.

The downside of an all-cash, all-stock offer for shareholders is that their sale of shares is a taxable event. Even if they sell their shares to the acquirer at a premium, taxes may take a significant chunk of their earnings if the sale price is higher than the price investors paid when they initially purchased their shares. However, all shares of stock that are made at a price higher than the stock's cost basis constitutes a taxable event, so this particular sale is not that different from a tax standpoint from a normal sale on the secondary market.

Another possible acquisition method would be for the acquiring company to offer shareholders an exchange of all the shares they hold in the target company for shares in the acquiring company. These stock-for-stock transactions are not taxable. The acquiring firm could also offer a combination of cash and shares.