When companies acquire other businesses, the purchase price can be settled through cash, shares or a combination of both. The choice of consideration affects the buyer’s liquidity, the seller’s future exposure and how financial risks are distributed between the parties. Consequently, the payment structure can be as important as the headline transaction value.
The Nedbank acquisition of a controlling stake in NCBA illustrates a mixed consideration structure. Nedbank’s offer for 66.0% of NCBA comprises 20.0% cash and 80.0% newly issued Nedbank shares listed on the Johannesburg Stock Exchange. For every 100 NCBA shares accepted, shareholders are entitled to Kshs 2,100.0 in cash and 4.0 Nedbank shares, subject to the offer terms.
For the acquiring company, using shares reduces the immediate cash requirement. This can be particularly relevant for banks, where capital is required to support lending, absorb potential losses and satisfy regulatory requirements. Financing part of an acquisition through equity can therefore reduce reliance on existing liquidity or additional borrowing.
The structure also affects the risk borne by sellers. NCBA shareholders receiving Nedbank shares remain exposed to changes in Nedbank’s share price and therefore participate in the future performance of the combined group. They receive less immediate liquidity but retain an ownership interest in the acquiring company.
Cash consideration provides greater certainty of value at completion because sellers are not subsequently exposed to movements in the acquirer’s share price. However, the buyer must have sufficient liquidity or financing capacity to meet the cash obligation.
Kenya’s banking sector provides an earlier example. In 2019, KCB Group acquired National Bank of Kenya entirely through a share swap, with NBK shareholders receiving one KCB share for every ten NBK shares. The transaction resulted in 147.0 mn additional KCB shares being listed on the NSE.
The contrast between the transactions demonstrates how consideration structure can influence acquisition financing. KCB used an all-share arrangement, while Nedbank combines cash with shares. The latter provides immediate liquidity to NCBA shareholders while preserving their exposure to Nedbank’s future performance.
The composition of consideration therefore provides insight into liquidity requirements, risk allocation and financial flexibility. A cash-heavy structure increases the buyer’s immediate funding burden, while a share-heavy structure preserves liquidity but leaves sellers exposed to the acquirer’s future market performance.
