Can someone explain the math here?
Here is the problem from BIWS: The buyer is worth $1 billion, has 100 million shares outstanding, and
its current share price is $10.00. It wants to issue 10 million shares to acquire the
seller for $100 million.
But if the market believes that the seller is only worth $80 million rather than
$100 million, the buyer’s share price might fall to $9.81 (implying a total value of
$1.08 billion) to reflect this lower value.
I am confused because based on this math, the seller is still receiving 9.81*10mm, which means the seller receives 98.1 million dollars despite the market valuing it at 80 million? Why?
Sometimes a buyer will overpay and chalk the difference up to goodwill because they think they can squeeze some accretion from the transaction through cost-cutting or synergies.
I am confused b/c in the same BIWS guide, it says: A buyer pays $100 million for the seller in an all-‐‑stock deal, but a day later the market decides that it’s only worth $50 million. What happens?
and the answer is: Depending on the deal structure, the seller would effectively only receive half of what it had originally negotiated.
in my original post, the seller does not receive half of what they originally negotiated. They received 99%.
Goodwill has more to do with book value than market value, though you're right about paying a premium in the hopes of achieving synergies.
The example shows what happens when a large buyer acquires a relatively smaller target and values the target more than the market. The logic:
Buyer believes its worth $1B alone and target would add $100MM of value if acquired, bringing its total net worth to $1.1B. Buyer says to seller, "we believe the portion of value you'd contribute to the combined company would be $100MM, or 1/11th of our total $1.1B. So we will issue you shares that total 1/11th of the new combined company."
The seller accepts, believing the value of 1/11th of the combined company is worth more than 100% of its own company as a standalone. It accepts the risk that the market value of its shares will fluctuate.
Because these shares are publicly traded, the market weighs in on the deal. If the market only believes the acquired company adds $80MM in value, it will value the combined company at $1.08B.
Now, instead of: $1B/100MM shares = $10/share Or what the company hoped: $1.1B/110MM shares = $10/share We have instead: $1.08B/110MM shares = $9.81/share
So the seller's 10MM shares fell from $100MM to $98.1MM. It didn't fall all the way to $80MM because it also got 1/11th ownership of the legacy company, which the market still values at $1B.
Put another way, the seller expected to receive: 1/11th of the legacy buyer @ $1B = $90.9MM +1/11th of its company @ $100MM = $9.1MM =$100MM
Instead, it got: 1/11th of the legacy buyer @ $1B = $90.9MM +1/11th of its company @ $80MM = $7.2MM =$98.1MM
this makes a lot of sense, but can you explain why in the other example, the author says the seller can expect to receive half of what it negotiated? I will repost below:
A buyer pays $100 million for the seller in an all---stock deal, but a day later the market decides that it's only worth $50 million. What happens?
and the answer is: Depending on the deal structure, the seller would effectively only receive half of what it had originally negotiated.
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