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
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.