All-Cash Deal

An all-cash deal is an acquisition where one company pays cash to purchase the outstanding equity of another company. The precept here is that when buying with cash, there is less risk in the share price of the acquiring company going down, like it usually does, after the acquisition.

When one company buys another one, deal makers have a choice about what currency they want to use. We don't just mean choosing Euros or Yen or Quatloos or Dollars or whatever. The choice is even broader than that. The buying company might not even use money at all. Instead, one company could offer the other company's shareholders an exchange of stock.

In this case, shareholders of the company getting bought effectively become part owners in the company that's making the acquisition. They give up 100% ownership in the one company for a smaller stake in the bigger, combined company. The issue: You can't buy a meal in Las Vegas with company stock. (Or anywhere else, really, but we're trying to coin a phrase here).

To do anything else but get invited to shareholders' meetings, you would have to sell at least some of that stock to get cash in order to buy stuff. Meanwhile, using stock also causes a valuation issue, because the stock of both companies are moving day-to-day, meaning valuation is constantly changing. However, the all-cash deal has downsides as well. Because the shareholders are receiving a big pile of cash all at once, they might be on the hook for a big tax bill.

Companies can also split the difference, paying for acquisitions with a combination of of cash and stock. Deciding how to structure an acquisition (including whether to use cash or stock) is a big part of the negotiation process surrounding potential mergers. Like doing this? Become an investment banker. And make bank.