Mix and match facilities and loan notes in acquisitions

Goergen, Marc and Frecknall Hughes, Jane (2007). Mix and match facilities and loan notes in acquisitions. In: Gregoriou, Greg and Renneboog, Luc eds. International mergers and acquisitions activity since 1990: quantitative analysis and recent research. Quantitative Finance. Burlington, MA: Elsevier, pp. 135–166.

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This chapter deals with acquisitions that offer target shareholders a choice of different types of consideration, including the possibility of mixing and matching these considerations. It also discusses why bidders may want to issue loan notes and why target shareholders may want to take up loan notes rather than cash or shares. The study presented in this chapter provides three major contributions to the literature. First, contrary to existing studies, we do not take the eventual payment for an acquisition as a given, but rather take into account the choice of different types of considerations offered to the target shareholders. Second, whereas most of the existing literature concentrates on the bidder's point of view, we focus on the target shareholders' point of view. Third, in contrast with most other studies, which consider loan notes to be equivalent to cash, we clearly distinguish between the two. We make the following conclusions. First, the popularity of loan notes over the late 1990s and early years of the 21st century has increased. Second, contrary to the suggestions of theories on asymmetric information and findings from empirical studies on wealth gains, target shareholders do not always choose (exclusively) cash instead of shares. Third, loan notes issues offer clear benefits to both the target shareholders and bidders. More precisely, using the tax models developed, we show that, in certain circumstances, the tax position of target shareholders may make loan notes a more attractive choice than other types of consideration. Furthermore, bidders derive benefits from loan notes in the form of improved cash management and cheap financing of acquisitions.

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