Question: A company has identified a takeover target with a current equity value of 2 billion. It believes that it can create 0.5 billion of value

A company has identified a takeover target with a current equity value of £2 billion. It believes that it can create £0.5 billion of value by acquiring this company and that it will need to pay a premium of 20%. It has little cash and its debt levels are exceeding 5 times EBITDA. Additional borrowing would be extremely costly and leave the company with reduced financial flexibility. The alternative would be to fund the acquisition with a stock swap. However, the company is concerned about the negative signal that a stock swap would send to the market since this would indicate that its share price is overvalued. What would you recommend?

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