Module Note | October 2007 (Revised November 2010)

Evaluating M&A Deals-Equity Consideration

by Carliss Y. Baldwin


What the acquiring company pays for a target in a merger or acquisition is called "consideration." Consideration can be in the form of cash, shares, or a combination of the two. Lays out the basic mechanics of equity consideration. Derives formulas for the Deal NPV of an all-equity deal and shows how to calculate and interpret key parameters, including percentage ownership, the exchange ratio, the acquisition premium, the wealth transfer, and the target's downside protection. Explains how synergies and over-valued shares affect the Deal NPV. Also shows how to calculate critical break-even exchange ratios. Ends by looking at cash-and-stock deals.

Keywords: Mergers and Acquisitions; Equity;


Baldwin, Carliss Y. "Evaluating M&A Deals-Equity Consideration." Harvard Business School Module Note 208-077, October 2007. (Revised November 2010.)