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What is a Cash Merger?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 September 2016
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Also known as a cashout merger, a cash merger has to do with the mode of payment tendered in a business acquisition. The acquiring firm chooses to utilize cash as the means of purchasing the stock of the acquired firm, rather than utilizing its own stocks to complete the transaction. Typically, the acquiring firm will first purchase any shares held by the target company, then seek to purchase any shares currently in the possession of investors.

One of the main benefits of a cash merger is that the new owner immediately gains all the assets of the acquired business, without any need to convert stocks or use some other process to prepare those assets for any desired use. By essentially buying the shares of the target company, the new owner is taking over the interests of the former stockholders and becomes the sole stockholder in the acquired company. At that point, the new owner may hold the shares, earning returns as those shares increase in value. There is also the option of holding the shares for a time, then creating some type of public offering as a means of generated revenue for the parent company.

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The mechanics of a cash merger are somewhat different from other merger strategies. In a more common scenario, the acquiring company works with the targeted company to acquire controlling interest by using its own stock to buy shares of that target. With this approach, investors in the target company are not frozen out of the process and continue to retain their interest in the acquired company. Assuming that the merger is considered a positive event in the marketplace, those investors will likely see their returns increase as they are issued shares of stock for the newly combined business. With a cash merger, the investors in the target company are bought out and no longer have an interest in the company at all.

While a cash merger does allow the acquiring company to gain control of the target companies stocks with relative ease, the process does temporarily reduce the purchaser’s available capital. This is usually a short-term issue that is resolved once the merger is complete and the new owner determines the best strategy for generating revenue to offset the expense. When crafted with care, the result of the merger is a business that is stronger financially and has a presence in the marketplace that is far more impressive than the original two business entities.

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David09
Post 2

@nony - As cash mergers go, the definition of the word the article gives is accurate. However I want to point out something else: the difference between a merger and acquisition. The two are easily confused but they are not the same.

In an acquisition, one company buys out another and the acquired company ceases to exist, in terms of its unique brand and identity. So if XYZ, Inc. bought out Acme, Inc., the resulting company is simply XYZ, Inc., with Acme, Inc. having been subsumed under the parent company.

In a merger, two companies combine and a new company is formed. The old stock is given up and new stock is issued. They may keep the name of the first company or create a new name, but it is a new company altogether.

In practice, of course, it makes little difference how the two combine. These are just the technicalities.

nony
Post 1

I worked for a telecommunications company that got bought out by another company. It was a cash out merger. It was also what is called a horizontal merger; this means that we were both competitors, but now merged together.

The opposite of this is a vertical merger, where one company buys out its supplier or something like that.

The acquiring company was able to write off some of our assets when it bought us out for an all cash merger, so the tax benefits helped to sweeten the deal a little bit.

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