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Finance and capital markets
Course: Finance and capital markets > Unit 6
Lesson 7: Mergers and acquisitionsAcquisitions with shares
Mechanics of a share-based acquisition. Created by Sal Khan.
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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)
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)
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)
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)
- 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)
- 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)
No, your total shares would be 4 in company A and 1 in company B. B would also own 2 shares of company A. Owning 2 shares does not cause a combination of A&B.(2 votes)
- 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)
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)- 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)
- 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)- They just trade a bunch of their shares for the shares of the other company.
This is why it is described as a merger rather than an acquisition.(1 vote)
- 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)- Generally If 51% say yes, the minority is forced to go along.(1 vote)
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)- They won't pay more than market for a non-controlling stake.
They pay more than market to gain control of the company.
When a deal is done using stock, part of the negotiation involves each side deciding what they think both stocks are really worth.(1 vote)
- 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, @3:20, 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) @3:36, Sal said sold 'those' shares and raise 60 million, which 'those' shares is he referring to?(1 vote)- 1) Where are they going to get the money to do that? The point of using shares is that you don't have to pay in cash for the acquisition. If you buy the shares, you have defeated the purpose. You might as well give the cash to the other guy.(1 vote)
3:20Video 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.