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Acquisitions with shares

Mechanics of a share-based acquisition. Created by Sal Khan.

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  • orange juice squid orange style avatar for user Mathieu Hébert
    In the example the numbers are nicely made up, but what happens if you need to give something like 1.25347 shares of company A to each owner of a share of B? You obviously can't offer fractions of shares...
    (14 votes)
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    • blobby green style avatar for user M
      Cash is usually paid in lieu of "residual fractional shares". Sometimes to pay out a little more cash or to get rid of small shareholders, they will increase the conversion size. For example, instead of 10 new shares for 1 old share they give 100 new shares for 10 old shares. The conversion ratio is the same but the minimum conversion size is higher. So if you own 8 old shares, you will get cash instead of 80 new shares.
      (25 votes)
  • leaf green style avatar for user Jye578
    If Company B goes through with this acquisition and takes the 2 shares of Company A in exchange for one share of Company B, then wouldn't the market price of one share of Company A drop due to the sudden increase in supply?
    (5 votes)
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    • aqualine ultimate style avatar for user Abdulaziz.Saja
      Yes and no, Yes if u increase the supply of anything the price would go down. But their not increasing their supply of shares just because they need the money and can't find another way to do it. They are increasing their number of shares to buy out another company that they think will add to their own company's value. So if this acquisition proves to be that and actually turns out to be very beneficial to the buyer then they might just see their share price increase because the "demand" out there will greatly exceed the extra supply.

      However, what IS going to happen is that according to the example Sal outlined, then the existing shareholders of the buyer company would see their ownership percentage dilute (decrease) since they now own the same amount of shares when due to this transaction the number of shares increased.
      (4 votes)
  • blobby green style avatar for user omar.nadim11
    I'm a little bit confused , if the company B worth $5Om And you decide to Pay $60m , the market doest care, the company B still worth $50m so how can you value it at 60 in you assets . or does it mean that company B is worth 50m in your assets and the share price has decreased in order to conserve the equation A=L+E ??
    (3 votes)
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  • blobby green style avatar for user Sai Kiran Gorthi
    lets say I own 6 shares of company A.I gave away 2 of them to B in exchange for 1.So now,would my total shares be 5 in a company that includes A & B ?
    (2 votes)
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  • blobby green style avatar for user wzx1991
    A little confused, so when company A acquires another company, they just issue some new stock? Isn't this sort of pulling money in the thin air? Theoretically they can acquire whole lots of companies just by issuing new stock and don't have to actually pay anything?
    (1 vote)
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  • leaf grey style avatar for user Ivan
    Let's say someone owns 25% of the company B and doesn't want to exchange his shares for the new ones even though owning new shares seems more benefitial. What's then? And what if that guy owned say 50% of all the shares.
    (1 vote)
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    • male robot hal style avatar for user Andrew M
      Usually the shareholders have no choice but to exchange their shares if the deal has been approved according to the bylaws of the company. The shares will just be converted. If you don't like it, too bad sell the stock.
      If you own 50%, then you can block approval of any deal, in most (nearly all) companies. So the deal wouldn't be happening if you didn't want it to.
      (1 vote)
  • leaf grey style avatar for user Ivan
    According to this article: http://www.investopedia.com/articles/investing/092815/energy-transfer-equity-set-acquire-williams-companies.asp

    Energy Transfer Equity LP (ETE) announced that it will merge with Williams Companies (WMB) for approximately $32.6 billion.

    I looked up the two companies in Yahoo Finance and it turned out that ETE has a market cap of 21.43B whereas WMB 27.41B. How can a company with a smaller market cap acquire another company with a larger market cap?
    (1 vote)
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  • male robot hal style avatar for user Tanak Nandu
    Slightly confused as to what happens if there isn't a consensus, wherein not all/majority of the shareholders of company B agree on this acquisition? Especially when it's a public company. Is that why the board prefers to maintain at least 51% of control in the company? If so, are the people holding the shares of company B, which now become 2 each of company A stock, forced to this decision?
    Also, could the acquisition of a company by means of giving them company shares be thought of as a hybrid merger, as the acquiree now has stake in the acquirer, although a new company isn't being formed and there's just 2 parties involved. Thanks!
    (1 vote)
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  • leafers seedling style avatar for user Sara Lockertsen
    can someone explain to me why company A would want to pay over-price for company B stock? Especially if they don't get majority in company B and do not really have much say in how company B does things? Do they get use of the assets of company B (like if company B had an employee with a set of skills that company A could benefit from)?
    (1 vote)
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  • leaf green style avatar for user Jon lim
    1) Instead of doing a secondary offering of 2 million shares in the video like Sal mentioned, is it possible for company A to do a share repurchase (be it on or off market) and then give those shares to company B?
    2) Adding on to that, @ , Sal said that 1 million shares are going to be put at the Asset side of company A's balance sheet, what about the debt of company B? ( Or did we assume that B was all equity financed?)
    3) @, Sal said sold 'those' shares and raise 60 million, which 'those' shares is he referring to?
    (1 vote)
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Video transcript

What I want to do in this video is try to understand how one company can buy another company or could merge it with another company by using its stock. So we have a situation here, where Company A is acquiring Company B for $60,000,000 in A's shares and what we'll see is, it's not going to exactly be $60,000,000. It'll depend on where Company A's shares trade. Right now, they're trading at $30 a share. So in order to make this transaction happen in A's shares, what would happen is, is that A says, "Look, I need to raise the equivalent of $60,000,000" "in shares." or "I need to create the equivalent of" "$60,000,000 in shares." "If each of my shares right now on the market" "are worth $30 a share, then I can do that by" "creating or issuing 2,000,000 shares." So Company A here is going to create another 2,000,000 shares. They're going to create another 2,000,000 shares and if they wanted to do it as a cash transaction, they could take these shares and sell them into the market, do a secondary offering and then hopefully raise $60,000,000 in cash and then use that cash to buy Company B, but this is a share offering. They're not going to do it with cash. They're going to directly give, assuming Company B shareholders agree to this, they're going to give the shares directly to Company B's shareholders in exchange for essentially getting control of these shares right over here. So, they're going to take these 2,000,000 shares which right now in the market look to be worth $60,000,000 and they're going to give them to all of Company B's shareholders in exchange for all of Company B's existing shares. So what's going to happen is Company A is going to give 2,000,000 shares of Company A to the shareholders of Company B and in exchange, Company B will give all of the shareholders of the ... of company ... We will give their shares to Company A. So they will give, so ... or their shares of Company B, I should say. Company B's shareholders are going to give all of their 1,000,000 shares in Company B in exchange for those 2,000,000 of Company A. So what's going to happen is each of these shareholders of Company B are going to get 2 shares of Company A for every 1 share of Company B. So they're going to get 2 shares ... 2 shares of A for every share of B they own and that makes sense economically because right now on the market, let's say that it's trading at $50 a share. It has a $50,000,000 market cap. By offering a $60,000,000 in share, they're offering a premium. This is what will kind of convince all of the shareholders to maybe say, "Hey, this is a pretty good deal." "I'm getting 20% above the market price" and when you get 2 shares in exchange for your one $50 share, you're getting 2 shares that are right now trading at $30 a share. So it seems like a good deal for you. I can exchange something worth $50 for two things worth 30 or essentially exchange something worth 50 for something worth $60. I'm going to take it and if they do take it, then what's essentially going to happen is, is that those 1,000,000 shares are going to be put onto the asset side of Company A's ... of Company A's balance sheet or maybe we could just put that Company B is now here, because all of the shares are here. It's not completely owned and the company was able to do that by issuing these shares. The other option, they could have issued ... They could have sold those shares in the market, raised $60,000,000, then given the $60,000,000 directly to the Company B's shareholders and then it would have had the exact same effect.