. . . Some studies suggest that deals paid for in cash, rather than stock, tend to generate better returns for investors in the acquiring company. A Citigroup study of US acquisitions between 1990 and 2002, for example, found that cash-financed transactions outperformed the industry by 4.3 per cent in a two-year period; stock-financed deals, by contrast, underperformed by 5.2 per cent.

Why? One reason may be that cash-financed deals raise pressure on acquirers to extract the value they perceive in a target. After all, interest payments focus the mind. Alternatively, stock financing may be not so much a cause as a marker of deals that are tricky to implement: mammoth acquisitions of publicly owned businesses, say, rather than manageable bolt-ons.

. . . cash does not guarantee a successful outcome. And investors should note another Citigroup finding: on average, the market's initial reaction is a good guide to whether the deal will dazzle, or disappoint, in the longer term.

Quite simply, issuing shares to buy another company has fewer immediate checks and balances than cash deals which may require the blessing of the bond market. Bond investors are generally more sober-minded than equity buyers, as they pay close attention a very basic equation: the ability for timely repayment of interest and principal.

If the bond market sours on an acquirer’s deal, that acquisition is much less likely to get completed. Serial acquirers issuing shares to do deals needed to pump earnings can’t be worried too much about the equity market’s reaction to any individual deal, since they have to have that acquisition. If the deal doesn’t happen, the earnings music stops and they’re standing there without a chair.

I find the final point of the FT article particularly interesting, as will shareholders of Proctor & Gamble and SBC Communications. P&G shares fell about 5% from a few days before announcement of the Gillette acquisition to a few days afterward. SBC shares fell about the same amount in the days surrounding its announcement of the AT&T purchase.