Mergers and Acquisitions: Where Is It Heading in Terms of Method of Payment?: A Comprehensive Study
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For over a century surges of mergers and acquisitions have come and gone. Takeovers have become a prominent means of expansion in Corporate America as opposed to internal expansion. During the decade of the 1980s, $2 trillion was spent on shuffling assets through the acquisition and restructuring of 25, 000 U.S. companies. The debate goes on whether these deals were good for any company in specific or for the economy in general. The recent surge shows signs of subsiding, at least in the U.S. As a result of the external pressures of the U.S. recession and Persian Gulf War, executives, bankers, and lenders have been forced to thoroughly examine their investment decisions on a financing viewpoint Specifically, they are concentrating on the method of payment and are realizing the difference in the types of financing. This paper investigates the capital structure of a takeover. It focuses on the different methods of payment and determines the most frequently used acquisition currency from mergers and acquisitions (m&a) from various industries occurring during 1988- 1990. Consistent with earlier studies, this paper has found that cash is the dominant method of payment. Cash is preferred because it conveys positive signals on the future prospects of the acquisition as opposed to stock offers which yield smaller stock returns of the bidding firm. Furthermore, the increased use of cash over the decade indicates more value-conscious deal-making. The issuance of additional shares could cause a dilution in shareholder value of the bidder's common stock, thus reducing the overall value of the firm. Where is m&a activity heading into in terms of method of finance? The findings of this paper reveal a sharp increase in the use of stock in 1990. However, "cash remains king" as the acquisition currency. The paper also finds m&a movement to Europe. Most countries have the m&a fever, but not the adverse side effects.