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Market Value of Equity and Cash on Hand

Hey guys,

Question: Has there ever been a case where market value of equity (Market Cap) has dropped below a company’s cash on hand, or if this is even possible. 

For example, if I had a company that has $100M in cash, $0 Debt, and BV of equity at $100M. Let’s say that a company is in Pharma, and was unable to have its drug licensed by regulators. Therefore, there is no future revenue stream unless something changes. Of course, market reaction would be negative to this news, and MV of equity will drop. Does the $100M act as floor for the equity value?

Logically, it makes sense that this would be the case. Otherwise, wouldn’t an acquirer buy the company for less than $100M, and instantly get $100M in cash?

Thanks folks. 

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Depends on what the expectation is for the cash is .  I wouldn’t assume the cash is a floor.  Management teams can blow through cash easily 

happens all the time in junior mining in canada, especially in recessions. there are four that i know well that are trading near or at a discount to cash.

new millennium (nml) and fancamp exploration (fnc) are two that trade at a discount to cash and ST securities at the moment.

nml is at a discount due to mild cash burn (burn has been reduced lately due to halting of exploration) and significant insider ownership (tata owns 27% and will likely not sell anywhere near cash value so a ST revaluation is unlikely). 

fnc is at a discount due to exploration related cash burn which is rapidly eating through cash. the projects they’re spending on are just alright economically but are early stage and the cash may end up being wasted over time.

karnalyte resources (krn) and western potash (wrx) both trade near cash and historically have traded at a huge discount to cash. cash burn here is crazy and on terribly uneconomic projects so they’re blowing their brains out.

I wrote an article on Seeking Alpha a long time ago about this issue. Hope it helps.

https://seekingalpha.com/article/324912-make-it-rain-corporate-edition

It’s been a while since I’d checked on the company in that article. It looks like the market cap is currently $22 million so all of that cash that was available before the acquisition has been vaporized.

https://finance.yahoo.com/quote/QUMU/

1. It is the same thing. In reality you could get control of the company with less than 100% of the shares. 

2. Yes

3. That is not likely. In order to attract a company to sell you are going to need to offer a premium over the current price. You could try to acquire 100% of the shares on the open market or through a tender offer but that is probably going to drive the price up.