The Daily Technical #47: Do companies depreciate land?

Good morning. Welcome to the 47th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Is it better to finance a deal via debt or stock?

Buyer’s Perspective:

When the buyer’s P/E ratio is significantly higher than the target’s, a stock transaction will be accretive, which is an important consideration for buyers and may tilt the decision towards stock.

When considering debt, the buyer ’s access to debt financing and the cost of debt will influence the buyer’s willingness to finance a transaction with debt. The buyer will also analyze the deal’s impact on its capital structure, credit rating implications, and credit statistics.

Seller’s Perspective:

Most sellers will prefer cash (i.e., debt financing) over a stock sale unless tax deferment is a priority for the seller.

A stock sale is usually most palatable to the seller in a transaction that more closely resembles a merger of equals and when the buyer is a public company, where its stock is viewed as a relatively stable form of consideration.

Common Mistakes

1. Ignoring Perspectives: Students often focus on just one side of the transaction, generally the buyer’s. Remember to distinguish and address both the buyer’s and the seller’s motivations.

2. Overlooking Financial Metrics: Forgetting to consider financial metrics like P/E ratios, or not assessing the impact on capital structure can lead to an incomplete analysis.

TL;DR

• Balance both buyer and seller perspectives; the buyer focuses on P/E ratios and debt access, while sellers generally prefer cash unless specific conditions make stock attractive.

• Always incorporate financial metrics and potential credit implications in your analysis.

• Don’t ignore situational factors that might influence the buyer’s or seller’s decision in stock vs. debt transactions.

TODAY’S QUESTION
Do companies depreciate land?

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THAT’S A WRAP
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See you tomorrow,

The HirePrep Team