Question

Which statement reflects a significant difference in a cash transaction and a stock transaction?

a. The resulting company's eps is accretive in a cash transaction.
b. In a cash transaction, the acquiring company bears all the risk of synergies not working out.
c. In a stock transaction, the target company shareholders will no longer have any shares, of the target or acquiring company, that are traded on any exchange.
d. The acquired company is responsible for making the integrations of the companies work.

Answer 1

In a stock transaction, the target company shareholders will no longer have any shares that are traded on any exchange. The correct answer is C

Step-by-step explanation:

c. In a stock transaction, the target company shareholders will no longer have any shares, of the target or acquiring company, that are traded on any exchange.

When a stock transaction occurs, the target company's shareholders exchange their shares for shares of the acquiring company or a cash equivalent. This means that the target company shareholders will no longer hold any shares of the target or acquiring company that are being traded on an exchange. On the other hand, in a cash transaction, the acquiring company bears all the risk of the synergies not working out.

The significant difference between cash and stock transactions in acquisitions is that in a cash transaction, the acquiring company assumes all risks if synergies fail, with no future payment obligations to the target company's shareholders.

The significant difference between a cash transaction and a stock transaction when it comes to mergers and acquisitions is that in a cash transaction, the acquiring company bears all the risk of synergies not working out, as suggested by option B. Unlike issuing bonds or borrowing from a bank where a company is committed to scheduled interest payments regardless of its income, a cash transaction does not obligate the acquiring company to make future payments to the target company's shareholders. Furthermore, in a stock transaction, the target company's shareholders become part-owners of the acquiring company, as they receive shares as compensation for the acquisition.

In contrast, in a stock transaction, target company shareholders receive shares of the acquiring company, which are still traded on exchanges, negating statement C. Additionally, the responsibility for making the integrations work tends to be shared or falls on the acquiring company rather than the acquired company alone, contrary to statement D. Therefore, statement B is the one that reflects a significant difference between cash and stock transactions.