Would a buyer rather pay for an acquisition with cash, debt or stock?

On cost alone, most buyers would use cash first, then debt, then stock. But cost isn't the only thing that matters. To compare cost, I look at what each one does to earnings after tax. Cash costs the interest the buyer stops earning on it. Debt costs the interest on the new borrowing. Stock costs the earnings the buyer gives away to new shareholders, which is its earnings yield, the inverse of its P/E. Say the tax rate is 25%. Cash earning 4% costs 3% after tax. Debt at 6% costs 4.5% after tax. A buyer trading at 20 times earnings has an earnings yield of 5%. So cash is cheapest, then debt, then stock. Then the things that aren't cost. Cash is limited by what's on the balance sheet, and the buyer needs to keep some to run the business. Debt is limited by how much the buyer can borrow without hurting its credit rating. Stock has no balance sheet limit, but it dilutes existing owners, can shift control and may need a shareholder vote. So my answer is cash first if the buyer has it, debt up to a comfortable level, and stock for a deal too big for either.

On cost alone, most buyers would use cash first, then debt, then stock. But cost isn't the only thing that matters. To compare cost, I look at what each one does to earnings after tax. Cash costs the interest the buyer stops earning on it. Debt costs the interest on the new borrowing. Stock costs the earnings the buyer gives away to new shareholders, which is its earnings yield, the inverse of its P/E. Say the tax rate is 25%. Cash earning 4% costs 3% after tax. Debt at 6% costs 4.5% after tax. A buyer trading at 20 times earnings has an earnings yield of 5%. So cash is cheapest, then debt, then stock. That order can flip. A buyer at 40 times earnings has a yield of 2.5%, so its stock looks cheapest in EPS terms. Then the things that aren't cost. Cash is limited by what's on the balance sheet, and the buyer needs to keep some to run the business. Debt is limited by how much the buyer can borrow without hurting its credit rating. Stock has no balance sheet limit, but it dilutes existing owners, can shift control and may need a shareholder vote. Stock also shares risk. The seller's shareholders end up owning part of the combined company, so if the deal disappoints they take some of the loss. With cash, the buyer keeps all the upside and all the risk. For the seller, cash is certain, while a stock offer's value can fall before closing. One caveat. Earnings yield is the EPS cost of stock, not its true cost. Shareholders expect a return well above 5%, so stock isn't cheap just because the EPS math works. So my answer is cash first if the buyer has it, debt up to a comfortable level, and stock for a deal too big for either or when the buyer wants the seller to share the risk.