# Deal Structuring Concept Card: [Deal or case name] > A concept card for the deal structuring part of a second-year mergers and acquisitions elective: how the form of > payment (cash, stock or a mix), the price protection (fixed exchange ratio, fixed value, collars), contingent > payments (earn-outs), the legal form of the transaction, the deal protections and the accounting for the acquisition > change who gains, who bears which risk and what the buyer really pays. It builds on the core cards > `mba/mba-growth-strategy-card` (the acquisition test: synergies against the premium) and `mba/mba-dcf-valuation-card` > (standalone value) and does not re-teach them. It is for MBA students in an M&A, corporate finance or private equity > elective, candidates for corporate development and banking roles, and managers who must approve a deal term sheet. > Worked example A (Northfield Outdoor Co. buys a target for cash or stock) is fully solved, Worked example B (a > Corvane Robotics earn-out) is half solved and Exercise C is left to you; the self-test answers sit in a separate key. > Source basis: Myers and Majluf (1984), Hansen (1987), Travlos (1987), Rappaport and Sirower (1999), Kohers and Ang > (2000), Cain, Denis and Denis (2011) and the acquisition method of IFRS 3 and ASC 805, written up in original words > and notation. Northfield Outdoor Co. (treated as listed for this example), Corvane Robotics, Target G, Target H, > Acquirer J and Target K are fictional, and every number was computed in Python. > Replace every [bracketed] value and every row marked *Example*. > This is a learning aid, not legal, tax, accounting or investment advice: deal terms, tax treatment and filings > depend on the jurisdiction and the facts, so take them to counsel and advisers. ## Document control | Field | Value | |---|---| | Course or project | [M&A elective, session 6 / deal team / case competition] | | Learner or team | [Your name or learning team] | | Deal analysed | [Northfield Outdoor Co. and Target G (fictional) / your case] | | Acquirer and target | [Northfield Outdoor Co. / Target G] | | Currency and unit | [USD m, per-share amounts in USD] | | Valuation date | YYYY-MM-DD | | Evidence sources | [Standalone DCF, synergy model, share price history, draft term sheet] | | Reviewed by | [Instructor, mentor or corporate development lead] | | Version | [0.1] | ## Contents 1. When to use it 2. The idea in plain language 3. Formulas and notation 4. Assumptions and limits 5. How deal teams use it in practice 6. Dated regulatory and accounting facts 7. Worked example A (fully solved): Northfield Outdoor Co. and Target G 8. Worked example B (half solved): a Corvane Robotics earn-out 9. Exercise C (unsolved): Acquirer J and Target K 10. Connections to other cards 11. Common mistakes and misconceptions 12. Self-test questions 13. My notes and next steps 14. Sources and further reading 15. Answer key ## When to use it **One-sentence rule:** use this card when the question is no longer "should we buy and at what value?" but "how do we pay, how do we protect both sides against what can change before and after closing, and what will the deal look like in the accounts?". | Use it when | Use something else when | |---|---| | A board must choose between a cash offer, a stock offer or a mix | You need to test whether the deal creates value at all (`mba/mba-growth-strategy-card`, `mba/mba-synergy-valuation-card`) | | Buyer and seller disagree on the target's future and need a bridge such as an earn-out | You need the target's standalone value (`mba/mba-dcf-valuation-card`, `finance/valuation-report`) | | The acquirer's share price may move between signing and closing | You need the effect on earnings per share (`mba/mba-accretion-dilution-card`) | | You must explain goodwill and the purchase price allocation after a deal | You are structuring a leveraged buyout by a financial sponsor (`mba/mba-paper-lbo`, `mba/mba-lbo-model-card`) | | You review the protections in a merger agreement (break fees, conditions) | You plan the integration (`finance/m-and-a-integration-100-day-plan`) | | A start-up is sold to a strategic buyer | You negotiate a venture financing round (`mba/mba-term-sheet-card`) | ## The idea in plain language **The value test does not change; the split of value and risk does.** The core card gives the test: a deal creates value for the buyer's shareholders only if the present value of net synergies is larger than the premium paid over the target's standalone value. Structure decides three further things. First, how the gain (or loss) is shared between the two groups of shareholders. Second, who carries the risks that remain after signing: that synergies fall short, that the acquirer's shares were overvalued, that the target's business was weaker than it looked. Third, what the buyer's choice tells the market about what its managers believe. **Cash or stock.** In a cash deal the target's shareholders receive a fixed amount and leave. The acquirer's shareholders keep all of the synergy upside and all of the synergy risk. In a stock deal the target's shareholders become shareholders of the combined firm. They share in whatever the combined firm turns out to be worth: if synergies disappoint, part of the shortfall falls on them. Rappaport and Sirower (1999) put the trade-off in two questions for the buyer: how confident are we in the synergies, and do we think our own shares are fairly priced? High confidence and fairly priced or undervalued shares point to cash; doubt about synergies or a belief that the shares are richly priced point to stock. **Stock as a signal.** Myers and Majluf (1984) showed that when managers know more than investors, a firm that issues equity tends to be one whose managers think the shares are overvalued, so investors mark the price down when equity is issued. The same logic applies to paying with shares: offering stock can tell the market that the buyer thinks its currency is expensive. Hansen (1987) modelled the choice of payment under two-sided information gaps: stock makes the target share in the risk that the buyer overpays for a target whose value the buyer cannot observe. Travlos (1987) found that acquirers announcing stock offers earned significantly negative abnormal returns around the announcement, while acquirers paying cash did not, which is consistent with the signalling view. **The true cost of a stock deal.** The headline value of a stock offer (exchange ratio times the acquirer's current share price) is not what the buyer pays. The target's shareholders receive a fraction of the combined firm, and the combined firm includes the synergies. So the real cost is that fraction times the value of the combined firm. When synergies are positive, a stock deal costs more than the headline; when they are negative, it costs less. **Price protection between signing and closing.** Months can pass between the signed agreement and closing. In a **fixed exchange ratio** deal the number of acquirer shares per target share is fixed, so the target's holders bear the risk that the acquirer's share price falls, and the acquirer knows exactly how many shares it will issue. In a **fixed value** deal the value per target share is fixed and the number of shares floats, so the acquirer bears the price risk and may have to issue many more shares if its price falls. A **collar** combines the two: a fixed ratio inside a price band and a fixed value outside it (or the reverse), often with a right to walk away if the price moves beyond a wider band. **Contingent consideration bridges disagreement.** When the seller believes the target will grow fast and the buyer does not, an **earn-out** pays part of the price only if agreed targets (revenue, EBITDA, a product milestone) are met after closing. Kohers and Ang (2000) argued that earn-outs serve two purposes: they manage the valuation risk of an uncertain target (agreeing to disagree) and they keep the seller-managers working for the buyer (agreeing to stay). Cain, Denis and Denis (2011) found earn-outs to be more common and larger where the target's value is harder to judge, as in private and high-growth targets. In pharmaceutical and life-science deals the same idea often takes the form of a contingent value right (CVR) that pays on a regulatory or sales milestone. Earn-outs create their own problems: disputes over how the target was run after closing and over accounting definitions. **Legal form and tax.** A deal can be a purchase of the target's shares, a purchase of its assets, or a statutory merger. The form decides which liabilities come with the business, whose approval is needed, and how the deal is taxed for buyer and seller (for example, whether the buyer gets a higher tax basis in the assets). Tax rules differ by jurisdiction and change often: treat the form as a question for tax counsel, with the questions in the worksheet below. **Deal protections.** A signed deal is exposed to a higher bid and to events before closing. Common terms are a no-shop clause with a fiduciary out for a superior proposal, a target termination fee payable if the target walks away for a better offer, a reverse termination fee payable by the buyer if financing or regulatory approval fails, a material adverse change (MAC) condition, and a go-shop period in some private equity deals. Officer (2003) found that deals with target termination fees had higher completion rates and were associated with higher premiums, not lower ones. Each term moves risk; none is free. **The deal in the accounts.** Under the acquisition method of IFRS 3 and US GAAP ASC 805, the buyer measures the consideration at fair value on the acquisition date (for shares: the share price on that date, not on the signing date), recognises the target's identifiable assets and liabilities at fair value (including intangibles such as brands and customer relationships that were never on the target's balance sheet), and records the remainder as goodwill. Goodwill is not amortised under IFRS or for US public companies; it is tested for impairment at least annually (IAS 36; ASC 350). Acquisition-related costs (advisers, legal, valuation) are expensed as incurred, not added to goodwill (IFRS 3 paragraph 53; ASC 805), except the costs of issuing debt or equity, which follow IAS 32 and IFRS 9 (and the corresponding US GAAP topics): they are deducted from the equity raised or from the carrying amount of the debt. ## Formulas and notation **Value to the acquirer's shareholders (cash deal):** $$ NPV_A^{\text{cash}} = V_T + S - P, \qquad \text{Premium} = P - V_T $$ **Stock deal: exchange ratio, ownership and true cost:** $$ ER = \frac{p_{\text{offer}}}{P_A}, \qquad N_{\text{new}} = ER \times N_T, \qquad x = \frac{N_{\text{new}}}{N_A + N_{\text{new}}} $$ $$ V_{AT} = V_A + V_T + S - C, \qquad \text{Cost}^{\text{stock}} = x \, V_{AT}, \qquad NPV_A^{\text{stock}} = V_T + S - C - x \, V_{AT} $$ with $C$ the cash part of a mixed offer ($C = 0$ in an all-stock deal, and then $NPV_A^{\text{stock}} = (1-x)V_{AT} - V_A$). **Break-even synergies.** With no cash paid and the acquirer fairly priced, $NPV_A^{\text{stock}} = 0$ when $S = V_A/(1-x) - V_A - V_T$. When $ER$ was set from the acquirer's market price, this equals $P - V_T$, the same break-even as a cash deal: structure changes the slope of the buyer's gain against synergies, not where it crosses zero. **Collar (fixed ratio inside the band $[L, H]$, fixed value outside):** $$ v(P_A) = \begin{cases} ER \times L & P_A < L \\ ER \times P_A & L \le P_A \le H \\ ER \times H & P_A > H \end{cases}, \qquad ER(P_A) = \frac{v(P_A)}{P_A} $$ **Earn-out (single milestone):** $$ PV_{\text{EO}} = \frac{p \times E}{(1 + r_{\text{EO}})^{n}} $$ **Goodwill (acquisition method, simplified, no non-controlling interest or previously held stake):** $$ GW = \text{Consideration} - \left[BV_{\text{NA}} + \Delta FV - \tau \, \Delta FV\right] $$ | Symbol | Meaning | Unit | |---|---|---| | $V_A$, $V_T$ | Standalone (intrinsic) value of acquirer and target equity | USD m | | $S$ | Present value of synergies net of integration costs, after tax | USD m | | $P$ | Price paid for the target's equity (cash deal) | USD m | | $p_{\text{offer}}$ | Offer value per target share | USD | | $P_A$ | Acquirer's share price | USD | | $N_A$, $N_T$ | Shares outstanding of acquirer and target before the deal | m | | $ER$ | Exchange ratio: acquirer shares per target share | ratio | | $N_{\text{new}}$ | Acquirer shares issued to target holders | m | | $x$ | Target holders' fraction of the combined firm | % | | $V_{AT}$ | Value of the combined firm's equity after the deal | USD m | | $C$ | Cash part of the consideration | USD m | | $L$, $H$ | Lower and upper acquirer prices of the collar band | USD | | $v(P_A)$ | Value per target share delivered under the collar | USD | | $p$, $E$, $n$, $r_{\text{EO}}$ | Probability of the milestone, earn-out payment, years to payment, discount rate | -, USD m, years, % | | $BV_{\text{NA}}$ | Book value of the target's net assets | USD m | | $\Delta FV$ | Fair-value step-ups of identifiable assets (intangibles, inventory) | USD m | | $\tau$ | Tax rate used for the deferred tax liability on step-ups | % | | $GW$ | Goodwill | USD m | ## Assumptions and limits - **Market price as value.** The formulas use the acquirer's market price both for the exchange ratio and for its standalone value. If managers believe the price is wrong, compute the cost with their intrinsic value as well, as in Worked example A step 4, and expect the market to read the choice of currency. - **Synergies are a forecast.** $S$ is the most uncertain number in the model and is usually biased upward. Cost synergies are easier to deliver than revenue synergies; haircut them differently (`mba/mba-synergy-valuation-card`). - **Financing has its own effects.** The cash case assumes the cash comes from balance sheet cash or new debt with no change in value from the financing itself. With debt, add the tax shield and the distress costs (`mba/mba-capital-structure-card`); with a rights issue before a cash deal, the signalling problem returns. - **Earn-out discount rates are judgements.** A milestone payment is risky and often correlated with the buyer's own business. The single-rate formula is a teaching shortcut; option-pricing or simulation methods are used for complex earn-outs (`mba/mba-options-real-options-card`). - **Accounting is not value.** Goodwill, amortisation of acquired intangibles and the earnings per share effect (`mba/mba-accretion-dilution-card`) do not change cash flows, but they change reported numbers that boards and covenants watch. - **Tax and law are local.** Asset versus share deals, tax-free reorganisations, approval thresholds and fiduciary duties depend on the jurisdiction and change. Use the worksheet questions, not this card, to decide them. ## How deal teams use it in practice 1. **Agree the value range first:** standalone value, synergies by type and timing, walk-away price. 2. **Choose the currency:** cash, stock or a mix, from the two Rappaport and Sirower questions, the acquirer's balance sheet capacity and what the seller needs (liquidity, tax deferral, continuing upside). 3. **Protect the price:** fixed ratio, fixed value or collar, with walk-away rights if the share price moves too far. 4. **Bridge disagreement:** an earn-out or CVR when the gap is about the target's future, not about today. 5. **Choose the legal form** with counsel: share purchase, asset purchase or merger; approvals needed. 6. **Allocate deal risk:** representations and warranties, indemnities or warranty insurance, conditions, MAC, termination fees, regulatory efforts clauses. 7. **Model the accounts:** purchase price allocation, goodwill, amortisation, earnings per share, leverage ratios. 8. **Test the structure** against scenarios: synergies at zero, half and plan; acquirer price down 20%; milestone met or missed. ```mermaid flowchart TD A["Value range agreed: standalone value, synergies, walk-away price"] --> B{"Confident in synergies?"} B -- Yes --> C{"Acquirer shares fairly priced or undervalued?"} B -- No --> D["Lean to stock: target shares synergy risk"] C -- Yes --> E["Lean to cash: keep the upside"] C -- No --> F["Stock is cheap currency, but expect a negative market signal"] E --> G{"Balance sheet capacity for cash?"} G -- No --> H["Mix of cash and stock"] G -- Yes --> I["Cash, financed with cash on hand or debt"] D --> J["Price protection: fixed ratio, fixed value or collar"] F --> J H --> J I --> K{"Disagreement about the target's future?"} J --> K K -- Yes --> L["Add earn-out or contingent value right"] K -- No --> M["Legal form, protections, accounting model"] L --> M M --> N["Scenario test, then board approval"] ``` ## Dated regulatory and accounting facts As of October 2026 (checked 2026-10-28; check before you rely on any of them): | Topic | Dated fact | Official source | |---|---|---| | US premerger notification (HSR) | The US Federal Trade Commission's 2026 adjusted thresholds took effect on 17 February 2026: size-of-transaction threshold USD 133.9m (transactions above USD 535.5m are reportable regardless of the size-of-person test); filing fees in six tiers from USD 35,000 (transactions below USD 189.6m) to USD 2,460,000 (USD 5.869bn or more). Thresholds are revised every year. Whether a filing is needed depends on further tests: ask antitrust counsel. | ftc.gov, premerger notification program: current thresholds and filing fee information | | EU Merger Regulation | A concentration has an EU dimension if combined worldwide turnover exceeds EUR 5,000m and at least two parties each have EU turnover above EUR 250m, or under the alternative test (EUR 2,500m worldwide, three-member-state tests, EUR 100m EU turnover for at least two parties); not if each party earns more than two-thirds of its EU turnover in one and the same member state. National regimes apply below these thresholds. | competition-policy.ec.europa.eu, merger procedures | | Business combinations (IFRS) | IFRS 3 *Business Combinations* sets the acquisition method; IFRS 18 (issued April 2024) made consequential amendments to it. The IASB's project "Business Combinations: Disclosures, Goodwill and Impairment" (Exposure Draft March 2024, proposing new disclosures about how acquisitions perform and changes to the IAS 36 impairment test) was still in redeliberation at the Board's 23 September 2026 meeting: no final amendments had been issued. | ifrs.org, IFRS 3 page and the project page | | Business combinations (US GAAP) | ASC 805 applies the acquisition method and expenses acquisition-related costs; under ASC 350 public companies test goodwill for impairment rather than amortising it, while private companies may elect an accounting alternative (ASU 2014-02) that amortises goodwill on a straight-line basis over ten years or less. Checked against the ASU wording quoted in SEC filings, because the fasb.org pages could not be opened at the check date: confirm in the Codification. | fasb.org (Accounting Standards Codification) | | Goodwill impairment (IFRS) | IAS 36 requires goodwill to be allocated to cash-generating units and tested for impairment at least annually and whenever there is an indication of impairment. | ifrs.org, IAS 36 | **Worksheet questions for counsel and advisers** (do not answer them yourself in a real deal): | ID | Question | Owner | |---|---|---| | DS-Q-01 *(Example)* | Is this a share purchase, an asset purchase or a merger, and what does each mean for liabilities that transfer? | [Deal counsel] | | DS-Q-02 *(Example)* | Which approvals are needed (boards, shareholders of either side, regulators, foreign investment screening)? | [Deal counsel] | | DS-Q-03 *(Example)* | How is each form taxed for the buyer and for the sellers, and is a tax-deferred exchange available for stock consideration? | [Tax adviser] | | DS-Q-04 *(Example)* | Which merger control regimes are triggered on the latest thresholds, and what timetable follows? | [Antitrust counsel] | | DS-Q-05 *(Example)* | How will contingent consideration be classified (liability or equity) and remeasured? | [Auditor or accounting adviser] | ## Worked example A (fully solved): Northfield Outdoor Co. and Target G **Situation (*Example*, fictional).** Northfield Outdoor Co., treated as listed, trades at USD 30.00 with 60.0m shares (equity value USD 1,800.0m, the same starting point as the mini-case in `mba/mba-mergers-acquisitions-guide`, which studies a different target). Here it plans to acquire Target G, a listed direct-to-consumer outdoor apparel brand trading at USD 15.00 with 20.0m shares (USD 300.0m). The board has agreed in principle to offer a 30% premium, USD 19.50 per share or USD 390.0m in total. The synergy model gives a present value of net synergies (after tax and integration costs) of USD 140.0m. Assume both share prices equal intrinsic value unless stated. **Step 1: cash offer.** | Item | Value | Excel | |---|---|---| | Price $P$ | USD 390.0m | `=15*(1+30%)*20` | | Premium | USD 90.0m | `=390-300` | | $NPV_A^{\text{cash}}$ | USD 50.0m | `=300+140-390` | | Northfield price after the deal (cash) | USD 30.833 | `=(1800+50)/60` | **Step 2: all-stock offer at the same headline value.** | Item | Value | Excel | |---|---|---| | Exchange ratio $ER$ | 0.6500 | `=19.5/30` | | New Northfield shares $N_{\text{new}}$ | 13.0m | `=0.65*20` | | Target holders' share $x$ | 17.81% | `=13/(60+13)` | | Combined value $V_{AT}$ | USD 2,240.0m | `=1800+300+140` | | True cost of the stock offer | USD 398.90m | `=13/73*2240` | | $NPV_A^{\text{stock}}$ | USD 41.10m | `=300+140-398.90` | | Northfield price after the deal (stock) | USD 30.685 | `=2240/73` | The stock offer costs USD 8.90m more than the cash offer although both are "USD 19.50 per share" at announcement: Target G's holders own 17.81% of the synergies. Their gain is USD 98.90m against USD 90.0m in cash. **Step 3: who bears synergy risk?** NPV to Northfield's existing shareholders for different realised synergies (USD m): | Realised synergies $S$ | Cash: $NPV_A$ | Stock: $NPV_A$ | Target holders' gain, cash | Target holders' gain, stock | |---|---|---|---|---| | 0 | -90.00 | -73.97 | 90.00 | 73.97 | | 40 | -50.00 | -41.10 | 90.00 | 81.10 | | 90 | 0.00 | 0.00 | 90.00 | 90.00 | | 140 (plan) | 50.00 | 41.10 | 90.00 | 98.90 | | 200 | 110.00 | 90.41 | 90.00 | 109.59 | | 240 | 150.00 | 123.29 | 90.00 | 116.71 | Excel: cash `=300+S-390`; stock `=(1-13/73)*(1800+300+S)-1800`, with $x$ held in a cell at full precision. ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "description": "Northfield Outdoor Co. and Target G (fictional): NPV to Northfield shareholders against realised synergies, cash and stock offers, USD m", "width": 360, "height": 220, "data": {"values": [ {"synergies": 0, "offer": "Cash", "npv": -90.00}, {"synergies": 40, "offer": "Cash", "npv": -50.00}, {"synergies": 90, "offer": "Cash", "npv": 0.00}, {"synergies": 140, "offer": "Cash", "npv": 50.00}, {"synergies": 200, "offer": "Cash", "npv": 110.00}, {"synergies": 240, "offer": "Cash", "npv": 150.00}, {"synergies": 0, "offer": "Stock", "npv": -73.97}, {"synergies": 40, "offer": "Stock", "npv": -41.10}, {"synergies": 90, "offer": "Stock", "npv": 0.00}, {"synergies": 140, "offer": "Stock", "npv": 41.10}, {"synergies": 200, "offer": "Stock", "npv": 90.41}, {"synergies": 240, "offer": "Stock", "npv": 123.29} ]}, "mark": {"type": "line", "point": true}, "encoding": { "x": {"field": "synergies", "type": "quantitative", "title": "Realised PV of net synergies (USD m)"}, "y": {"field": "npv", "type": "quantitative", "title": "NPV to Northfield shareholders (USD m)"}, "color": {"field": "offer", "type": "nominal", "title": "Offer"} } } ``` Both lines cross zero at USD 90.0m of synergies, the premium. The stock line is flatter (slope 0.822 against 1.0): stock hands 17.81% of the synergy risk, up and down, to Target G's holders. **Step 4: what if Northfield's shares are overvalued?** Suppose Northfield's managers believe intrinsic value is USD 26.25 per share (USD 1,575.0m) while the market price is USD 30.00. In intrinsic terms the stock offer costs $17.81\% \times (1{,}575 + 300 + 140) = 358.84$ (`=13/73*(1575+300+140)`), so its NPV to existing holders is USD 81.16m against USD 50.0m for cash. Stock is cheaper for managers who think their shares are expensive, which is exactly why investors read a stock offer as a warning (Myers and Majluf 1984) and why Northfield's price may fall on announcement. **Step 5: a collar for the stock offer.** Fixed ratio 0.65 while Northfield trades between USD 27.00 and USD 33.00 (plus or minus 10%); fixed value outside the band. | Northfield price at closing | Exchange ratio | Value per Target G share | New shares (m) | Value under a pure fixed ratio | Ratio under a pure fixed value | |---|---|---|---|---|---| | 24.00 | 0.7313 | 17.55 | 14.625 | 15.60 | 0.8125 | | 27.00 | 0.6500 | 17.55 | 13.000 | 17.55 | 0.7222 | | 30.00 | 0.6500 | 19.50 | 13.000 | 19.50 | 0.6500 | | 33.00 | 0.6500 | 21.45 | 13.000 | 21.45 | 0.5909 | | 36.00 | 0.5958 | 21.45 | 11.917 | 23.40 | 0.5417 | Excel for the collar value with the price in B2: `=IF(B2<27,0.65*27,IF(B2>33,0.65*33,0.65*B2))`; ratio `=C2/B2`. ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "description": "Value per Target G share against Northfield share price at closing under three price-protection structures (fictional, USD)", "width": 360, "height": 220, "data": {"values": [ {"price": 22, "structure": "Fixed ratio", "value": 14.30}, {"price": 24, "structure": "Fixed ratio", "value": 15.60}, {"price": 26, "structure": "Fixed ratio", "value": 16.90}, {"price": 28, "structure": "Fixed ratio", "value": 18.20}, {"price": 30, "structure": "Fixed ratio", "value": 19.50}, {"price": 32, "structure": "Fixed ratio", "value": 20.80}, {"price": 34, "structure": "Fixed ratio", "value": 22.10}, {"price": 36, "structure": "Fixed ratio", "value": 23.40}, {"price": 38, "structure": "Fixed ratio", "value": 24.70}, {"price": 22, "structure": "Fixed value", "value": 19.50}, {"price": 24, "structure": "Fixed value", "value": 19.50}, {"price": 26, "structure": "Fixed value", "value": 19.50}, {"price": 28, "structure": "Fixed value", "value": 19.50}, {"price": 30, "structure": "Fixed value", "value": 19.50}, {"price": 32, "structure": "Fixed value", "value": 19.50}, {"price": 34, "structure": "Fixed value", "value": 19.50}, {"price": 36, "structure": "Fixed value", "value": 19.50}, {"price": 38, "structure": "Fixed value", "value": 19.50}, {"price": 22, "structure": "Collar", "value": 17.55}, {"price": 24, "structure": "Collar", "value": 17.55}, {"price": 26, "structure": "Collar", "value": 17.55}, {"price": 28, "structure": "Collar", "value": 18.20}, {"price": 30, "structure": "Collar", "value": 19.50}, {"price": 32, "structure": "Collar", "value": 20.80}, {"price": 34, "structure": "Collar", "value": 21.45}, {"price": 36, "structure": "Collar", "value": 21.45}, {"price": 38, "structure": "Collar", "value": 21.45} ]}, "mark": {"type": "line", "point": true}, "encoding": { "x": {"field": "price", "type": "quantitative", "title": "Northfield share price at closing (USD)", "scale": {"domain": [22, 38]}}, "y": {"field": "value", "type": "quantitative", "title": "Value per Target G share (USD)"}, "color": {"field": "structure", "type": "nominal", "title": "Structure"} } } ``` Reading the collar: inside the band Target G's holders take Northfield's price risk and Northfield knows its dilution; outside the band the roles switch. Below USD 27.00 Northfield must issue more shares (14.625m at USD 24.00 instead of 13.0m), so the agreement usually gives Northfield a walk-away right or a cash top-up option below a lower price. **Step 6: the accounts (cash case).** Target G's book net assets are USD 120.0m. The valuation team identifies a brand worth USD 70.0m, customer relationships worth USD 50.0m (useful life 10 years) and an inventory step-up of USD 8.0m. The deal is a share purchase, so the tax bases do not change and a deferred tax liability at 25% arises on the step-ups. | Item | USD m | Excel | |---|---|---| | Consideration (cash) | 390.0 | input | | Book net assets | 120.0 | input | | Fair-value step-ups | 128.0 | `=70+50+8` | | Deferred tax liability on step-ups | -32.0 | `=-25%*128` | | Fair value of identifiable net assets | 216.0 | `=120+128-32` | | Goodwill | 174.0 | `=390-216` | | Annual amortisation of customer relationships (pre-tax) | 5.0 | `=50/10` | In the stock case the consideration is measured at Northfield's share price on the acquisition date. If that price is USD 30.685 (the post-deal value in step 2), consideration is USD 398.90m and goodwill USD 182.90m (`=13*2240/73-216`). The same deal, paid differently, carries different goodwill. Adviser, legal and valuation fees would be expensed in the period, not added to goodwill; only the costs of issuing the new debt or shares are deducted from the financing (IAS 32, IFRS 9). **Step 6b: share deal or asset deal (illustration of the tax mechanics, not tax advice).** In a share purchase the target's tax bases carry over, which is why a deferred tax liability arises above. In an asset purchase (or where a jurisdiction allows an election to treat a share purchase as an asset purchase) the buyer's tax bases are generally stepped up to the price paid. Assume Target G's existing tax basis equals its book net assets of USD 120.0m and, as a simplification, that the whole step-up is deductible straight-line over 15 years (some regimes allow this for acquired goodwill and intangibles; the inventory step-up would in practice be deducted sooner). | Item | USD m | Excel | |---|---|---| | Fair value of identifiable net assets, no deferred tax liability | 248.0 | `=120+128` | | Goodwill in the asset deal | 142.0 | `=390-248` | | Step-up in tax basis | 270.0 | `=390-120` | | Annual extra tax deduction | 18.0 | `=270/15` | | Annual tax saving at 25% | 4.5 | `=18*25%` | | PV of the tax saving at 9% for 15 years | 36.27 | `=PV(9%,15,-4.5)` | On these assumptions the buyer could pay up to about USD 36.3m more for an asset deal and be no worse off. The seller usually asks to share that value, because an asset sale can raise the seller's own tax bill (for example a corporate seller taxed on the gain and its shareholders taxed again on distribution). Whether any of this applies, and at which rates and lives, is question DS-Q-03 for tax advisers. **Step 7: recommendation (*Example*).** (1) If the board trusts the USD 140m synergy case and believes Northfield's shares are fairly priced, pay cash: it is worth USD 8.90m more to existing holders and avoids a negative signal. Northfield's USD 50m of cash on hand (Exhibit 1 of the mini-case in `mba/mba-mergers-acquisitions-guide`) means most of the price would be debt-financed, so check leverage and covenants first (`mba/mba-capital-structure-card`). (2) If synergy confidence is low, offer a mix (for example half cash, half stock) so Target G's holders share the synergy risk. (3) Any stock part needs a collar with a walk-away right below USD 25.50 (15% down) because dilution rises fast below the band. (4) Ask counsel the DS-Q questions before the term sheet is signed. ## Worked example B (half solved): a Corvane Robotics earn-out **Situation (*Example*, fictional).** Corvane Robotics plans to buy Target H, a private machine-vision start-up. The founders ask USD 60.0m in cash. Corvane values Target H at USD 40.0m standalone plus USD 8.0m of net synergies (USD 48.0m). The founders expect FY2028 revenue above USD 25m; Corvane thinks this is unlikely. Proposed structure: USD 38.0m cash at closing plus USD 22.0m paid in two years if FY2028 revenue is at least USD 25m. Corvane puts the probability at 35%, the founders at 75%. Use 12% to discount the earn-out for both sides. | Item | Value | Excel | |---|---|---| | Corvane: PV of the earn-out | [ ] | `=35%*22/(1+12%)^2` | | Corvane: expected total cost | 44.14 | `=38+35%*22/(1+12%)^2` | | Corvane: NPV of the structured deal | [ ] | `=48-44.14` | | Corvane: NPV of paying USD 60m in cash | -12.00 | `=48-60` | | Founders: PV of the earn-out | 13.15 | `=75%*22/(1+12%)^2` | | Founders: value of the structured offer | [ ] | `=38+13.15` | | Maximum total payment | [ ] | `=38+22` | 1. Why can both sides accept the same structure even though their probabilities differ? [ ] 2. Name two terms the founders will want written into the earn-out definition, and why. [ ] 3. Name one way Corvane's integration plan could conflict with the earn-out. [ ] 4. Under IFRS 3 or ASC 805, how is the earn-out measured at closing, and what happens to a liability-classified earn-out afterwards? [ ] ## Exercise C (unsolved): Acquirer J and Target K **Situation (*Example*, fictional).** Acquirer J (listed, USD 50.00 per share, 80.0m shares) offers to buy Target K (listed, USD 30.00 per share, 20.0m shares) at a 25% premium, paid half in cash and half in Acquirer J shares valued at USD 50.00. The present value of net synergies is USD 200m. Both share prices equal intrinsic value. 1. Compute the price, the cash paid, the number of new shares and Target K holders' fraction of the combined firm. 2. Compute the combined value after the cash payment, the post-deal share price, the true value of the stock part and the NPV to Acquirer J's existing holders. 3. Repeat for synergies of USD 100m and USD 150m and compare with an all-cash offer. What do you notice at USD 150m? 4. Design a collar for the stock half: choose a band and say what happens outside it. 5. Target K's board asks for a reverse termination fee. When does that request make sense, and what does it protect against? ## Connections to other cards - `mba/mba-growth-strategy-card`: the acquisition test, premium against net synergies, and the build, borrow or buy choice that comes before any deal. - `mba/mba-synergy-valuation-card`: where $S$ comes from, how to phase and haircut it. - `mba/mba-accretion-dilution-card`: the earnings per share effect of cash, debt and stock financing. - `mba/mba-mergers-acquisitions-guide`: the elective as a whole, from strategy to integration. - `mba/mba-capital-structure-card`: pecking order and signalling (Myers and Majluf 1984) behind the currency choice. - `mba/mba-options-real-options-card`: collars and earn-outs are option positions. - `mba/mba-paper-lbo` and `mba/mba-lbo-model-card`: sponsor deals, where structure means leverage and equity cheques. - `mba/mba-corporate-governance-card`: who approves the deal and how management incentives can bias it. - `finance/due-diligence-request-list`, `finance/quality-of-earnings-scope`, `finance/investment-committee-memo` and `finance/m-and-a-integration-100-day-plan`: the practitioner documents around the structure. ## Common mistakes and misconceptions 1. **Treating the headline value of a stock offer as its cost.** The target owns part of the synergies; the true cost is $x \times V_{AT}$. 2. **Saying stock "saves cash" and is therefore cheaper.** Shares are a currency with a value. Issuing them is as real a cost as paying cash. 3. **Ignoring the signal.** A stock offer from a firm whose shares are richly valued tells the market something; plan for the announcement reaction. 4. **Forgetting who bears price risk before closing.** A fixed ratio puts it on the target's holders; a fixed value puts it on the acquirer, whose dilution can explode if its price falls. 5. **Valuing an earn-out at its maximum.** Expected value and discounting matter, and the seller and buyer will value it differently. 6. **Writing a vague earn-out.** Undefined revenue recognition, cost allocation or operating covenants lead to disputes. 7. **Mixing signing-date and closing-date prices in the accounts.** Consideration in shares is measured on the acquisition date. 8. **Thinking goodwill is "value created".** Goodwill is the residual of the price over identifiable net assets; an overpayment also ends up in goodwill until it is impaired. 9. **Choosing the legal form for the accounting result.** Form drives liabilities, approvals and tax; decide it with counsel on those grounds. 10. **Treating termination fees as costless.** They change the incentives of rival bidders and of the board. ## Self-test questions 1. Name five building blocks of a deal structure beyond the price. 2. Why does an all-stock offer usually cost the acquirer more than its announced value when synergies are positive? 3. The acquirer trades at USD 45.00 with 20m shares; the offer is USD 36.00 per target share in stock for 5m target shares. Compute the exchange ratio, the new shares issued and the target holders' fraction. 4. $V_A$ = USD 900m, $V_T$ = USD 180m, $S$ = USD 60m, and the target's holders will own 20% of the combined firm in an all-stock deal. What is the true cost and the NPV to the acquirer's existing holders? 5. Under a fixed exchange ratio and under a fixed value, who bears the acquirer's share price risk between signing and closing? 6. Consideration USD 500m; the target's book net assets are USD 320m; fair-value step-ups USD 80m; tax rate 25% on the step-ups. Compute goodwill. 7. An earn-out pays USD 10m in three years with probability 50%. At 10%, what is its present value? 8. What does Myers and Majluf (1984) imply about the market reaction to a stock-financed acquisition? 9. Give two reasons a seller might prefer stock to cash. 10. What is a reverse termination fee, and in which situations is it used? 11. How is contingent consideration treated under the acquisition method at closing and afterwards? ## My notes and next steps | Date | Note or action | Done | |---|---|---| | YYYY-MM-DD | *Example:* Rebuild the cash, stock and collar tabs for the deal in next week's case | [ ] | | YYYY-MM-DD | *Example:* Ask the corporate development team how they set collar bands and walk-away rights | [ ] | | YYYY-MM-DD | [Your action] | [ ] | ## Sources and further reading - Myers, S. C., and Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. *Journal of Financial Economics*, 13(2), 187-221. - Hansen, R. G. (1987). A theory for the choice of exchange medium in mergers and acquisitions. *The Journal of Business*, 60(1), 75-95. - Travlos, N. G. (1987). Corporate takeover bids, methods of payment, and bidding firms' stock returns. *The Journal of Finance*, 42(4), 943-963. - Roll, R. (1986). The hubris hypothesis of corporate takeovers. *The Journal of Business*, 59(2), 197-216. - Rappaport, A., and Sirower, M. L. (1999). Stock or cash? The trade-offs for buyers and sellers in mergers and acquisitions. *Harvard Business Review*, 77(6). - Kohers, N., and Ang, J. (2000). Earnouts in mergers: agreeing to disagree and agreeing to stay. *The Journal of Business*, 73(3), 445-476. - Officer, M. S. (2003). Termination fees in mergers and acquisitions. *Journal of Financial Economics*, 69(3), 431-467. - Moeller, S. B., Schlingemann, F. P., and Stulz, R. M. (2004). Firm size and the gains from acquisitions. *Journal of Financial Economics*, 73(2), 201-228. - Cain, M. D., Denis, D. J., and Denis, D. K. (2011). Earnouts: a study of financial contracting in acquisition agreements. *Journal of Accounting and Economics*, 51(1-2), 151-170. - IFRS Foundation. IFRS 3 *Business Combinations* and IAS 36 *Impairment of Assets*, https://www.ifrs.org (checked 2026-10-28); project page "Business Combinations: Disclosures, Goodwill and Impairment". - US Federal Trade Commission. "New HSR thresholds and filing fees for 2026" (20 January 2026), https://www.ftc.gov. - European Commission, DG Competition. Merger procedures and the turnover thresholds of the EU Merger Regulation, https://competition-policy.ec.europa.eu/mergers/procedures_en. - Textbooks (further reading, by name only): Bruner, *Applied Mergers and Acquisitions*; DePamphilis, *Mergers, Acquisitions, and Other Restructuring Activities*; Koller, Goedhart and Wessels, *Valuation*; Berk and DeMarzo, *Corporate Finance* (chapter on mergers and acquisitions). - Open resource: OpenStax, *Principles of Finance*, https://openstax.org/details/books/principles-finance (check the licence on the book page). ## Answer key **Worked example B.** Corvane's PV of the earn-out = $0.35 \times 22 / 1.12^2$ = USD 6.14m; expected cost USD 44.14m; NPV of the structured deal = 48.0 - 44.14 = USD 3.86m, against USD -12.0m for USD 60m in cash. Founders' value = 38.0 + 13.15 = USD 51.15m. Maximum total payment USD 60.0m. (1) Each side values the contingent payment with its own probability: the founders see USD 51.15m, Corvane expects to pay USD 44.14m, and the payment happens only in the world where the founders were right, in which case Corvane can afford it. (2) A precise revenue definition (recognition policy, treatment of bundled software and of revenue booked by other Corvane units) and operating covenants (budget, sales team, no changes that reduce Target H revenue), because otherwise the buyer controls whether the target is met. (3) Folding Target H's product into Corvane's own offering or moving its engineers to other projects may raise Corvane's value but lower Target H's measured revenue, which invites a dispute. (4) At fair value on the acquisition date as part of the consideration; a liability-classified earn-out is remeasured at fair value at each reporting date with changes in profit or loss, while an equity-classified one is not remeasured. **Exercise C.** (1) Price = 30 x 1.25 x 20 = USD 750m; cash USD 375m; new shares 375/50 = 7.5m; fraction 7.5/87.5 = 8.57%. (2) Combined value = 4,000 + 600 + 200 - 375 = USD 4,425m; post-deal price USD 50.571; stock part worth USD 379.29m; total cost USD 754.29m; NPV to Acquirer J holders = 600 + 200 - 754.29 = USD 45.71m. (3) At USD 100m: mixed USD -45.71m, all-cash USD -50.00m; at USD 150m both are zero, because synergies equal the premium of USD 150m: the break-even does not depend on the form of payment. (4) Example: fixed ratio of 0.375 between USD 45 and USD 55, fixed value of the stock half outside the band, walk-away right below USD 40. (5) When Acquirer J's financing or a regulatory approval is uncertain, the fee compensates Target K for being taken off the market and for the business disruption if the deal fails for reasons on the buyer's side. **Self-test.** 1. Form of payment, price protection (ratio, value, collar), contingent consideration, legal form and tax, deal protections and conditions (also acceptable: financing, representations and indemnities, governance of the combined firm). 2. The target's holders receive a fraction of the combined firm, which includes the synergies, so they capture part of the synergy value. 3. $ER = 36/45 = 0.80$; new shares $0.80 \times 5 = 4.0$m; fraction $4/(20+4) = 16.67\%$. 4. Cost $= 0.20 \times (900 + 180 + 60) = 228$; NPV $= 180 + 60 - 228 = 12$ (USD m). 5. Fixed ratio: the target's holders. Fixed value: the acquirer (through the number of shares it must issue). 6. Fair value of identifiable net assets $= 320 + 80 - 0.25 \times 80 = 380$; goodwill $= 500 - 380 = 120$ (USD m). 7. $0.5 \times 10 / 1.10^3 = 3.757$ (USD m); `=0.5*10/1.1^3`. 8. Investors infer that the acquirer's managers may think its shares are overvalued, so the acquirer's price tends to fall on announcement; Travlos (1987) found negative announcement returns for stock-financed bids. 9. Continuing upside in the combined firm's synergies; possible tax deferral where an exchange of shares qualifies (a question for tax advisers); a seller who believes in the buyer's prospects. 10. A fee the buyer pays the target if the deal fails for reasons on the buyer's side, typically lack of financing or of regulatory approval; used when those risks are material. 11. Measured at acquisition-date fair value and included in the consideration; liability-classified contingent consideration is remeasured at fair value through profit or loss until settled, equity-classified is not remeasured. ## Revision history | Version | Date | Author | Change summary | |---|---|---|---| | 0.1 | YYYY-MM-DD | [Your name] | First draft from the template | | 0.2 | YYYY-MM-DD | [Your name] | *Example:* Switched to half cash, half stock after the synergy review; collar added | ## Standard and licence note Based on the published corporate finance literature on the method of payment, signalling and contingent consideration (Myers and Majluf 1984; Hansen 1987; Travlos 1987; Rappaport and Sirower 1999; Kohers and Ang 2000; Cain, Denis and Denis 2011) and on the acquisition method of IFRS 3 and ASC 805, described in own words; regulatory facts are dated 2026-10-28 and must be checked on the official pages. The text, examples and numbers are original, and all companies are fictional. The card has no affiliation with any school, standard setter, regulator, publisher or author named. It is not legal, tax, accounting or investment advice. Template licence: MIT.