Stock Deal

A stock deal is the term given to a merger or acquisition where the primary payment method is made using the acquirers own stock. In the case of a merger, it is sometimes difficult to accurately define who is the acquirer. This is sometimes a PR exercise to reduce the “them and us” situation once the merger is consummated. However, as a rule of thumb the stock used is generally viewed as being that of the dominant partner or acquirer.

Stock deals, as well as stock plus cash deals are generally placed in the same category because the requirements are similar and slightly more complex than a straight forward cash only deal. When the stock of the acquirer is used, the acquiring firm may need the consent of its own stockholders to issue more stock if it is above a given level. This is not always a foregone conclusion. Existing investors may question the use of their funds and whether the target purchase is necessary. The level of stock dilution to existing shareholders is also a great concern as the stock price tends to underperform because of this in the near term.

In addition to this underperformance the mechanics of a stock deal merger arbitrage strategy also puts additional downward pressure on the acquirer stock price. Like cash only deals, investors purchase stock in the target firm. However, traders will also need to take a short position in the acquirer stock in the correct exchange ratio. This short selling “locks-in” the value of the spread at the time the trade was entered into. However the action also causes the acquirer price to fall further to the concern of existing acquirer shareholders.