Hi guys - I need help understanding the mechanics of an all stock buyout. Suppose CoA is trading at \$50 with 100 shares o/s and CoB is trading at \$25 with 100 shares o/s. CoA announces a buyout of CoB by issuing .7 shares of A for each share of B (\$35 equivalent). What should the price of CoA be (ignore synergies and ignore EPS method of valuing the new A). Suppose both are all-equity firms (no debt). I know the new share count will be 170 since A will issue 70 shares but what will the equity value of A be? 1. (100x\$50+100x\$25)/170 = \$44.11 2. (100x\$50+100x\$35)/170 = \$50 or something else I know this isn’t on the CFA but I’m having a hard time understanding this. Appreciate any help. Thank you.

According to the market, A was worth \$5,000 before the deal and B was worth \$2,500 before the deal. Ignoring synergies, the combined entity should be worth \$7,500. So, \$7,500/170 = \$44.11. Of course that’s before all the shareholder lawsuits claiming that A overpaid.

But now, B shareholders have a stock worth \$44.11 as opposed to the \$35 offer price. How did this happen? Did I not correctly calculate the consideration?

The offer was \$35/share for 100 shares, or \$3,500. They actually ended up with \$3,088 because, ignoring the possibility of synergies, the offer was too high and therefore dilutive. They still make out alright though, as they should have only received \$2,500 based on the market’s valuation of them.

p.s. I think this is on the CFA in L2.

Okay, let me organize this a bit.

1. The deal gets announced before the market opens and right after the open, A’s stock trades at \$44.11 because of the dilution.

2. Since the consideration was not in cash but in stock, B’s shareholders now have “new” A stock worth \$3,088 or \$44.11 for each of the 70 shares they received in exchange for the 100 of B they had previously.

Thank you!

I need to open my L2 books!

Glad I could help. BTW, it’s crap like this that makes me hate working on stock deals. Give me an all cash transaction any day. Heck, even throw in a bunch of contingent consideration if you want, just make it cash.