Merger question Forum

[AJS30]

is it better for a company who is being acquired to receive cash or stock? Also, can you do an all cash deal even if another company is offering 50 cents more per share or do you have to take stock in this option?

[A. Nony Mouse]

Is this a legal question? Because you know no one on this site can give you legal advice, right? (That is, even the attorneys on this site can't give you legal advice, it's against the rules.)

[AJS30]

I am a law student. I am working on a problem for a class that I don't understand, nor does my corp. outline help me, so I thought I would ask here.

[A. Nony Mouse]

Just checking.

[ph14]

is it better for a company who is being acquired to receive cash or stock? Also, can you do an all cash deal even if another company is offering 50 cents more per share or do you have to take stock in this option?

1. Sometimes stock will be better, sometimes cash will be better. It depends on a lot of things, such as the timing of the deal. I would look into the factors that determine whether the target company would want stock or cash.
2. Depends on your Revlon duties, I would think. You wrote the sentence in a very confusing and ambiguous way. If you write it more clearly I can try and be more helpful. It's not always clear when exactly Revlon is triggered or when Revlon would be violated. I would think that you should make some arguments about anything that is reasonably arguable.

[minnbills]

Wouldn't this depend on the value of the two companies? I mean, if you're getting bought by Apple you'd probably want stock.

[AJS30]

.

[nebula666]

So there problem is:

There is a company whose stock has gone down the past few years and is now valued at $30 per share with 2mil shares outstanding. They have been advised there are two options they can go with: first company will buy for $35 a share in all cash or is up for doing a stock deal where each shareholder would get one share of the acquiring companies stock (so it would be 1 for 1 as their stock is at $35 per share) & they have 4 mil shares outstanding, widely held. Then there is another company offering $36 a share and would also do a stock deal, but the acquired company shareholders would get 1/2 share of the of this companies stock as their stock is trading at $62 per share, but they have 20,000,000 shares outstanding and over 50% is held by its CEO. The company wants to go with the first company.

Revlon generally dictates that price is the only consideration in such a situation. Here, it seems like the greater value is technically with the second offer. However, I think that a decision to take the first company would likely still withstand the enhanced judicial scrutiny under Revlon because a compelling argument can be made that $35 cash is actually worth more than $36 worth of stock because there are fees involved in selling stock and the price could drop before they are actually able to sell. If both were pure cash offers or pure stock offers ($35 vs $36), it would be pretty hard to argue that taking $35 is not a breach of Revlon duties.

[skers]

So there problem is:

There is a company whose stock has gone down the past few years and is now valued at $30 per share with 2mil shares outstanding. They have been advised there are two options they can go with: first company will buy for $35 a share in all cash or is up for doing a stock deal where each shareholder would get one share of the acquiring companies stock (so it would be 1 for 1 as their stock is at $35 per share) & they have 4 mil shares outstanding, widely held. Then there is another company offering $36 a share and would also do a stock deal, but the acquired company shareholders would get 1/2 share of the of this companies stock as their stock is trading at $62 per share, but they have 20,000,000 shares outstanding and over 50% is held by its CEO. The company wants to go with the first company.

IDK how your professor works, but there are definitely deal elements that make a difference at something w/ as thin of a margin as $1 a share that you could read in (lock-ups, termination fees, ect.. Even if they take the deal with company one that could be justified under Revlon since $1/share doesn't seem enough for a control premium. There'd be no Revlon issue if they took the stock deal in 1 since there's no cash or change of control, though it'd probably have to be justified under Unocal.

[JusticeHarlan]

So there problem is:

There is a company whose stock has gone down the past few years and is now valued at $30 per share with 2mil shares outstanding. They have been advised there are two options they can go with: first company will buy for $35 a share in all cash or is up for doing a stock deal where each shareholder would get one share of the acquiring companies stock (so it would be 1 for 1 as their stock is at $35 per share) & they have 4 mil shares outstanding, widely held. Then there is another company offering $36 a share and would also do a stock deal, but the acquired company shareholders would get 1/2 share of the of this companies stock as their stock is trading at $62 per share, but they have 20,000,000 shares outstanding and over 50% is held by its CEO. The company wants to go with the first company.

Seems like there are four options before the board:

(1) Do nothing. Always an option. Pure business judgement rule standard.

(2) Take the $35/share cash offer. This clearly raises Revlon duties because shareholders are cashed out.

(3) Take the stock swap that right now is worth $35/share. Doesn't raise Revlon duties per Time v. Paramount, because the shareholders have a continued interest in the ongoing corporation. They'd still have to meet the standard for business judgement rule, showing they were informed with advisers and such when they made the decision, but can justify it on grounds other than the current price.

(4) Take the $36/share stock option. Even though this is a stock deal, it would probably trigger Revlon because a control shareholder can cash them out at his whim (like Sumner Redstone in Paramont v. QVC).

So, it seems like if the board decides to do (1) or (3), they won't be in Revlon-land and can justify their decision with standard informed decision making under BJR. If they take (2) or (4), they'd have to justify why they're giving their shareholders the best price, which as noted below can include things like deal structure and (when comparing the option taken to option (2) or (4)) the anticipated fluctuation/valuations of the shares offered as consideration.

I don't think Unocal comes into play here unless someone is going hostile and the board takes steps to quash the takeover attempt (including taking another deal).

Also:

Is this a legal question? Because you know no one on this site can give you legal advice, right? (That is, even the attorneys on this site can't give you legal advice, it's against the rules.)

I at the image of some CEO making the decision on how to sell a $60 million company using TLS as guidance.