Determinants of the payment methods in acquisitions

This paper has attempted to address the question of how the exchange medium in acquisitions is determined. A number of hypotheses are proposed for this study. After model development, a univariate analysis as well as a binomial logit estimate are conducted with the variables selected on the basis of a set of proposed hypotheses. Above all, it appears that the cash flow theory best accounts for the determination of payment method. The significances of the bidder\u27s cash flow and Q ratio reveal that low growth firms with large free cash flow may have the flexibility to support a management-led acquisition or a recapitalization that might include a big cash payout to shareholders. The acquisition strategy hypothesis is also supported in this study. The binary variable for the existence of competing bid turns out to have the largest t-statistic in all analysis. There is mixed support for the optimal capital structure hypothesis and Hansen model\u27s implications. The results suggest that consideration of both the bidder and target\u27s debt ratio influences the decision to some extent although it is not a major determinant in the payment method decision. The support for the information asymmetry assertion which argues that overvalued (undervalued) bidders use stock (cash) payment seems to depend on which proxy variable is used for the bidder\u27s valuation. With these results we can not conclude that the payment method is directly related to the bidder\u27s valuation. While we verify that the tax carryover variable is neutral to the choice of the payment method, we failed to provide strong empirical support for the hypothesis that the target\u27s step-up basis has a positive effect on the cash payments. The inability to measure such tax benefits precisely is a critical problem. Step-up basis variable is significantly positive when using the data of replacement cost from a 10-k file, but it is insignificant when the data of estimated replacement cost is used