Why do companies use cash to finance acquisitions?

The cynical answer is that they don’t want to return the cash to investors as a dividend or share buyback and they don’t know how to spend it to grow organically.

Why not just spend some of the cash sitting on the balance sheet?

The financial nerd answer comes down to what they see as their cost of capital. If they are public it can be better to raise equity or debt (depending on a lot of things). There is a concept of the WACC.

If they raise money in equity, they issue more shares which might reduce their EPS. CEO pay is often linked to EPS growth (or TSR).

If you raise too much debt your company is deemed riskier and so raising more debt has a higher interest rate.

It’s a trade-off.

Then it comes to negotiation. The acquired company likes cash because it’s cash. If you get paid in shares of the larger company, it’s not cash (yet).

If you can pay with shares depends on leverage and other things.

Using your cash sort of avoids a lot of issues.

You just need to have the cash.

Just bear in mind that logic doesn’t always apply to how deals are done. Politics and negotiation can often influence how things are done.

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