Would acquiring a target company's debt/pref shares reduce the price than if ord shares were only acquired?

Question

If an acquiring company purchases the target company's debt and/or preference shares (along with the ordinary shares), would this reduce the target price than if ordinary shares were only acquired?

Would we expect to see the price reduce by the equivalent amount of the target's balance sheet value of the debt and/or preference shares compared to the situation of only the ordinary shares being acquired?

Answer 1

No.

The 'price' that has to be paid is the price demanded by the existing Shareholders (and Bond holders etc). This will depend on how likely the target Company is to survive without being taken over.

Plainly, if the target is about to go bust, there is a very good chance that the acquiring Company could buy-up the debt (prior to the take-over) at a significant discount. Doing so would later save the combined Company significant costs (since after the take-over the bond holders etc. are going to expect to be paid back at full price).

Once the acquiring Company has taken over the Target, plainly the combined Company is responsible for paying off the Bond holders (& paying back any other debt).

If the acquiring Company purchased the debt prior to the take-over, then it now pays itself :-)