Acquisitions with shares

0:00What 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.

0:21It'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."

0:42"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.

1:12They'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.

1:28So, 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 ...

1:54We 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.

2:20So 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."

2:51"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.

3:13I'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.

3:30It'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.