M&A Dealmakers Turn to 'Cash-and-Stock Mixers'
A resurgence in M&A activity is being driven by the increased use of “cash-and-stock mixers” to bridge valuation gaps, particularly in the TMT sector. This mixed-consideration structure allows buyers to preserve cash while giving sellers potential upside in the combined company, helping to manage market uncertainty and divergent price expectations.
- An example of a prominent cash-and-stock deal is chip design software maker Synopsys' $35 billion acquisition of Ansys, in which Ansys shareholders were set to receive $197.00 in cash and 0.3450 shares of Synopsys common stock for each share. Another instance is CECO Environmental Corp.'s agreement to combine with Thermon Group Holdings, Inc. in a transaction valued at approximately $2.2 billion, offering shareholders the choice of cash, stock, or a mixed consideration. - Using a mix of cash and stock can signal an acquirer's confidence, or lack thereof, in the potential synergies of a deal; a preference for all-cash may indicate a strong belief in realizing future benefits, while a preference for all-stock could suggest the acquirer's own equity is overvalued. - For sellers, a stock component can offer potential tax advantages, such as the possibility of spreading capital gains over several years, which may lower their overall tax liability. - The structure of a deal is significantly influenced by macroeconomic factors like interest rates, which affect the cost of financing. Higher borrowing costs can make large all-cash transactions more difficult to finance, leading to a slowdown in M&A activity. - In volatile markets, mixed-consideration deals help manage the risk of fluctuating company valuations between the deal's announcement and its closing. This uncertainty can be significant, with the implied value of the deal potentially changing based on the acquirer's stock performance. - Earnouts are another tool used to bridge valuation gaps, especially for technology companies in earlier stages with less predictable future performance. These provisions involve additional payments to the seller contingent on the acquired business meeting certain performance milestones post-acquisition. - The technology sector has seen a trend of fewer but larger deals, with software M&A being a significant driver. In 2024, while tech deal volume decreased, the value of deals increased, largely due to major software transactions. - The narrowing valuation gap between private and public markets is a key predictor of private M&A transaction volume. As this gap has decreased from a peak in mid-2023, the volume of announced private company M&A has grown.
