A Cash Election is a type of payment option available during a merger or acquisition. The target company shareholders can elect to receive cash in lieu of the acquirers stock as the merger consideration for their shareholding in the target Company. The term cash election describes the methodology for delivering the merger consideration to the target company shareholders in a takeover situation as opposed to the actual form of the applicable transaction. This method can be used in a merger, a stock swap or an asset acquisition. Cash Elections are often used as alternatives to giving each target shareholder the same combination of acquirer stock and cash received by all other target company shareholders. This helps reduce acquirer stock dilution whilst helping to maintain the prior debt / stockholder equity ratio.
Cash Elections are often structured so that target shareholders who make the election can receive all of their merger consideration in the form of cash. However, in order to avoid over stretching cash resources, a limit is usually placed on how much cash will be paid out. Therefore, target shareholders will often receive the cash as elected on assumption that the cash election is not oversubscribed. In addition to avoiding unnecessary acquirer stock dilution, a cash election transaction may be structured to incorporate certain tax considerations for specific types of target company shareholders. Key or influential shareholder may express a clear preference cash as per their business needs whilst others may prefer acquirer stock.
Dealing with Payment Elections
In merger arbitrage, it is important the arbitrageur is aware of the different payment options available. This is because they may each have different values. Therefore, the trader must be able to select to highest value available to them taking into account all factors. These may include tax issues, future dealing costs and possibly temporary stock borrowing costs to name a few. Legal or client obligations may force some institutions to make an election that is less than optimal creating an opportunity for the investor. The investor must also be aware of any limits placed on each type of election so as not to be caught out and forced to accept less than 100% of the preferred choice or election at the time of payment.
Cash Election Example
The following text is taken from the Form S-4/A – Registration of securities, business combinations: [Amend] filing with the SEC made by Berkshire Hathaway (BRK.A) in relation to the 2011 takeover of Wesco Financial (NOT to be confused with WESCO International NYSE: WCC)
You may hereby make ONE of the following elections:
(1) you may elect to receive cash as consideration with respect to all of your shares of common stock, par value $1.00 per share, of Wesco Financial Corporation (“Wesco common stock”), by checking the “CASH ELECTION” box;
(2) you may elect to receive shares of Class B common stock, par value $0.0033 per share, of Berkshire Hathaway Inc. (“Berkshire Class B common stock”) by checking the “STOCK ELECTION” box; or
(3) you may elect to receive a combination of cash and Berkshire Class B common stock by checking the “MIXED ELECTION” box and specifying the number of shares of Wesco common stock with respect to which you elect to receive each type of consideration.
In the event the sum of these numbers exceeds the number of shares of Wesco common stock you own, your election will be deemed invalid. If the sum is less than the number of shares of Wesco common stock you own, you will be deemed to have made a Cash Election for the balance of your shares.
In this document, the cash election option is clearly stated and instructions are given to shareholders where they can obtain more information. If a choice is not made, shareholders are advised what financing payment will be made on their behalf.
