Question regarding acquisition of public company
Hey guys,
I have a quick question regarding the acquisition of a public company. This is pretty basic, but one that I never figured out (and probably should ahead of upcoming interviews):
Using Softbank's acquisition of Sprint as an example, Softbank acquired 70% of Sprint last year (still awaiting regulatory approval).
Let's assume that they're paying for shares of Sprint all in cash, that Sprint is trading at $10/share, and their acquisition is at a price of $15/share.
Given the fact that these 70% shares of Sprint that Softbank is acquiring is held by the public, how exactly can Softbank say that they're acquiring 70% of Sprint? How do they know that the people holding onto shares of Sprint will actually sell their shares for $15/share?
Similarly, how do companies who buy out an entire public firm actually buy out 100% of the firm without any holdouts?
I feel like I'm missing a key piece of the puzzle here. Any explanation would be greatly appreciated.
When you hear the portion of
When you hear the portion of the company they are purchasing, it is already taking into consideration the premium that will be paid. So in your example, the 70% figure is based on Softbank buying those shares of Sprint at $15 and not $10. To answer your second question the Board would vote on whether on not to sell the company and minority investors would have very little say and could not hold out if the sale was approved by the board.
Hey Tyler, Thanks for your
Hey Tyler,
Thanks for your response. I understand the first point, but would like some clarification on the second:
If I, for example, was a shareholder of Sprint (let's say I owned 0.5% of all of Sprint's shares), and the Board of Directors voted to let Softbank purchase 70% of the company, I would be required to sell my shares at the 15% premium?
A Fellow Linguist: Hey
Hey Tyler,
Thanks for your response. I understand the first point, but would like some clarification on the second:
If I, for example, was a shareholder of Sprint (let's say I owned 0.5% of all of Sprint's shares), and the Board of Directors voted to let Softbank purchase 70% of the company, I would be required to sell my shares at the 15% premium?
Oh I see what you mean. The short answer to your question is no you would not be required, however it can get kind of tricky. A couple of different things could occur. It could be done via a tender offer, where the company offers to purchase investors share on a voluntary basis. The purchaser may purchase a large block from a large investor(s) although it wouldn't be done for such a large %. Finally, a PE firm may due a PIPE which their ownership would dilute the ownership of current stockholders. For example, say a company has $100 MM in assets ($50MM in equity and $50 MM in debt). Say, the company has NI of $5MM and the equity has a multiple of 10 giving a market cap of $50 MM, assuming there are say 5MM shares each share would be worth $10. Now lets say the company wants to sell more equity and reaches out to a PE firm for a PIPE (Generally this would only be done for companies that are having issues tapping the capital markets). The PE firm agrees to invest $50 MM in the firm, but does so at below the current market value buying the shares at $8.333 a share (6 MM shares). Let's say the company also takes out $50MM in debt again and now the balance sheet is $200MM in Assets ($100 Equity, $100 Debt). Assume the company produces ROA of 5% as it did previously. This would produce $10MM for 11 MM shares. This would drop EPS to $0.91 from $1.00 before the PIPE. With the multiple still at 10, the shares would be priced at $9.10. Where the original stockholders would be down 9%, while the PE firm is up about 9.25%. That's probably a little more information than you were looking for lol, but hopefully it helps.