There are several ways to structure M&A deals in the technology services sector. While all-cash deals offer more certainty, all-stock transactions have become more common. Strategic buyers often choose all-stock deals to save cash and better align incentives with the target company’s leaders.
All-stock deals help buyers keep cash for running the business and making future investments. Sellers, especially founders and senior managers, get shares in the new company, letting them benefit from its future growth. When the buyer is a public company, sellers can also eventually sell their shares for cash.
Current market conditions have increased the use of stock-based transactions. Higher interest rates have raised debt financing costs, prompting strategic acquirers to use equity more frequently as transaction currency.
All-stock transactions involve several structural challenges, with valuation alignment being a primary concern. With a publicly-traded acquirer and unlike cash deals, equity-based transactions expose sellers to share price fluctuations between signing and closing. Exchange ratios determine the number of acquirer shares per target share and may be fixed, offering ownership certainty but price risk, or floating, maintaining transaction value but creating uncertainty about final ownership. Collar provisions help manage these risks by setting price thresholds for the acquirer’s stock, allowing the exchange ratio to adjust and preserve deal value.
All-stock deals can frequently qualify as tax-free reorganizations, enabling sellers to defer capital gains taxation until they dispose of the acquirer’s shares. These advantages are typically accompanied by constraints, such as lock-up periods that limit the immediate share of sales.
For founders and executives, all-stock transactions present both opportunities and risks. Equity participation can create significant value if the combined company performs well, but founders should ensure they have enough liquidity outside the transaction to manage potential share price volatility during the lock-up period.
Elaxtra Advisors is an M&A and value-creation advisory firm that assists institutional investors, private equity-owned platforms, and strategic acquirers invest and create value in worldwide technology services companies. Please contact us to explore potential partnerships.