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Depending on tax factors, performance expectations for the post merger entity, situation of the stock market and the target�s shareholder demand of cash, the different sides of an M&A transaction decide whether to do a cash or stock swap deal.
Let�s get back to the example of company X willing to buy company Y to understand the process of M&A deals.
The process usually starts with a public offer that can be friendly or not, called tender offer. Basically, company X offers to buy shareholder�s share in company Y at a premium price, sometimes twice higher than the market. However, X can�t purchase more than 5% of Y�s stock without justifying its position and communicating its plans to the SEC and company Y itself. In fact, X has to clearly announce how many Y shares it owns and whether it plans to buy company Y or not.
If company X actually plans to buy Y, it fixes the price and the structure of the deal (stock swap or cash) with the assistance of I-banks. Company Y either accepts the offer or rejects it depending on the price and the general conditions of the transaction.
The post merger
A merger is said to be accretive when the acquiring company�s earnings per share increase after the deal is closed. This typically happens when the PER of the acquiring firm is higher than that of the target.
Inversely, a merger is said to be dilutive when the acquiring company�s earnings per share decrease after the merger. This happens when the PER of the buyer is lower than that of the acquired firm.
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