Quick Technical Question
Hey guys, I know this might be a really dumb question so my apologies for that. Suppose I own 100% of a company and it has a market cap of $10M. If the capital structure is 60% Debt and 40% Equity, and someone pays $10M for the company, what would I necessarily receive? Will I get $4M because the remainder of the $6M of Debt was refinanced, or will I get $10M?
Market cap represents equity so you’re getting $10m
Right sorry, my bad. So then in reality, my firm would have a market cap of $4M. If the company buying me out pays some sort of a premium to this (say $6M) and I receive $6M, what happens to that other $6M of Debt that's there? Does the company buying me out just refinance it?
they assume the debt
This is my understanding:
You own 100% of the equity in the company, so you own the full $10mm which is the market cap. Given that this full equity interest is only 40% of the company's capital structure- the total value of the company is $10mm/(0.4)= $25mm which would be the Enterprise Value (EV). recall that EV = Equity + Debt - Cash
So now we know that: EV = 25mm Equity = 10mm Debt = 15mm
If someone pays $10mm for the company this could be referring to the equity portion which is the market cap that you own 100% of- however where would the value be for the creditors? They would need to be paid if there is a change in control clause which typically exists, therefore the real purchase price would be the EV of 25mm, but really you as the equity owner are receiving the market cap anyway and the new owner assumes the existing debt so you end up with 10mm.
This is how I was interpreting the problem as well.
Gotcha, gotcha that makes a ton of sense man, appreciate it. I guess then my question would be, when a site like WSJ reports that ABC Company paid $50/Share for 123 Company, which is a 50% premium to what the shares of 123 Company are currently trading at, ABC Company is purely paying for the Equity Value of that company? And that $50/Share times Shares Outstanding isn't really the full amount ABC paid for 123, just the amount needed to take ownership (with them paying the debt in the capital structure + that $50/Share times Shares Outstanding being the total transaction cost?) - Apologies for wording that pretty terribly
The $50 per share is the offer value or the amount of equity they are paying for. Therefore the transaction value, including debt, will be even higher
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