Why do many expect an all-stock deal to have a lower valuation than an all-cash deal?

An all-stock deal is often expected to have a lower valuation than an all-cash deal primarily because cash proceeds are guaranteed, meaning the seller knows exactly what they will receive at the closing of the transaction. This certainty associated with cash transactions is attractive, as it allows the seller to appraise the value of the deal without considering the potential fluctuations of stock prices in the future.

In contrast, in an all-stock deal, the valuation is subject to market volatility; the value of the shares being received can change post-transaction based on company performance and market trends. This uncertainty can diminish the appeal of an all-stock deal, as the ultimate value received by the seller is not as fixed or secure as that of cash.

As a result, buyers may need to negotiate a lower valuation for an all-stock deal to account for the risks and uncertainties involved, leading to the expectation that all-stock transactions come at a lower valuation compared to all-cash deals.