19 Jun 2012
Taking Listed Shares as part Consideration for a Sale
Listed Shares vs Cash
When selling a business to a listed company (“Company”), many Vendors are reluctant to take shares in the Company as part of the purchase price, instead preferring to take cash. The benefit of full cash consideration is obvious and so in considering equal offers, the cash offer will always be preferred.
Benefit of Listed Shares
Having said that, a listed company is often more willing or able to increase the overall consideration in a deal if it includes shares in itself. Shares are often easier to find than cash and cheaper (particularly if the cash is debt funded). Further, the key people from the Vendor have a vested interest in ensuring that the integration of the business into the larger group is a smooth and successful one (to preserve the value of their shares in the Company).
Every advisor can tell you the horror story where a greedy Vendor took the higher offer that included shares, only to see those shares plummet in value. Even worse, the freshly issued shares were in a trading lock (as is often required to prevent the flooding of the market with the newly issued shares).
What to Look For
The point of this hot topic is to tell you that not all these types of deals are fraught with peril. Where the business being sold compliments the existing group, adds to the bottom line and where synergies and/or economies of scale can be gained from the transaction, then there is every chance that the shares issued could increase in value and be a sound investment.
This is where a bit of reverse due diligence comes in. Ask yourself, would you invest in this Company with your own funds (as that is effectively what you are doing) for the next 12 months? 3 years? 7 years plus? You should definitely do your homework on the Company if you are contemplating an offer of this type.
A Recent Example
M+K recently acted for a vendor in a transaction of this nature. M+K together with the financial advisors and accountants of the Vendor, were able to do some market research and investment analysis on the Company and found it to be a solid investment, particularly with the addition of our client’s business. The shares were subject to a voluntary trading lock for 24 months.
12 months on and the shares have increased in value by more than 25% (having peaked over that time at a 50% increase in value). The client has also received 2 fully franked dividends in that time representing more than 10% of the initial value of the shares
Moral of the Story
Taking shares as part of the purchase price of a business is not going to be right for every transaction, specialist legal advice and due diligence must be undertaken to ensure that the shares will at least retain their value. However, it is worth considering when selling a business where the price and purchaser are right. M+K has significant experience with sale of business transactions, including share sales, and are able to assist you to structure any transaction, whether shares form a portion of the purchase price or not.
For further information, please contact M+K in your state.
Victoria - (03) 9794 2600
New South Wales - (02) 8298 9533
Queensland - (07) 3235 0400
Tasmania - (03) 6210 0000