| How would you like it if you could get an additional | | | | If not, the acquisition is reduces cash-flow-per-share. |
| savings on almost everything you buy, after having | | | | If another company has a high stock-price multiple |
| negotiated your best deal? That's what reducing your | | | | that will be unaffected by making the same |
| cost of capital (especially your cost of equity) can do | | | | acquisition, that stock-based purchaser sees its |
| for you. | | | | cash-flow-per-share break-even coming at a much |
| Most CEOs are delighted if their company's stocks | | | | higher price for the company. |
| can sell around the industry average price/earnings | | | | Companies with rapid growth in stock price also find |
| ratio. If they can do better than that, the leaders are | | | | that the cash costs of their compensation for key |
| even happier and will usually avoid using the stock to | | | | employees falls. Employees are interested in having |
| buy anything in order to protect the multiple. Both | | | | stock options rather than cash both because of the |
| views are major missed opportunities. Consequently, | | | | upside potential and because tax rates are lower on |
| almost all companies today lack the fundamental skill | | | | this income. Further, the stock options don't affect |
| to create and sustain a stock-price premium that can | | | | company earnings as much as cash payments do. |
| be used to lower the company's cost of providing | | | | Also, companies can issue stock to get the cash to |
| offerings. | | | | make other kinds of investments and purchases. |
| With a sustained price/earnings premium, a company | | | | Where the source of this cash is cheap enough, it is |
| can use its stock in ways that shareholders approve | | | | like getting a discount on whatever the money is |
| to have the equivalent of a discount compared to | | | | used for. |
| competitors on everything the company purchases, | | | | Here's an example that many people never consider |
| from other companies to compensation to supplies. | | | | for implementing such a strategy: Issue stock |
| For instance, one company may be looking to | | | | whenever your multiple is well above its historical |
| purchase another for cash. Let's assume that the | | | | trend and buy back share (in excess of what's |
| price is one hundred million dollars. If the company | | | | required to offset employee stock options) |
| that is purchased earns more cash than the interest | | | | whenever your multiple is well below its historical |
| charges on the money borrowed to buy it, the | | | | trend level. |
| acquiring company sees its cash-flow-per-share rise. | | | | Copyright 2008 Donald W. |