Acquisitions with shares | Stocks and bonds | Finance & Capital Markets | Khan Academy

What I want to do in this
video is try to understand how one company can buy another company or could merge it with another
company by using its stock. So we have a situation
here, where Company A is acquiring Company B for
$60,000,000 in A's shares and what we'll see is, it's not going to exactly be $60,000,000. It'll depend on where
Company A's shares trade. Right now, they're trading at $30 a share. So in order to make this
transaction happen in A's shares, what would happen is, is that A says, "Look, I need to raise the
equivalent of $60,000,000" "in shares." or "I need to
create the equivalent of" "$60,000,000 in shares." "If each of my shares
right now on the market" "are worth $30 a share,
then I can do that by" "creating or issuing 2,000,000 shares." So Company A here is
going to create another 2,000,000 shares. They're
going to create another 2,000,000 shares and if
they wanted to do it as a cash transaction, they could
take these shares and sell them into the market, do a secondary
offering and then hopefully raise $60,000,000 in cash
and then use that cash to buy Company B, but this is a share offering.

They're not going to do it with cash. They're going to directly
give, assuming Company B shareholders agree to this,
they're going to give the shares directly to Company B's
shareholders in exchange for essentially getting control of
these shares right over here. So, they're going to take
these 2,000,000 shares which right now in the market
look to be worth $60,000,000 and they're going to give
them to all of Company B's shareholders in exchange
for all of Company B's existing shares.

So what's going to happen is
Company A is going to give 2,000,000 shares of Company
A to the shareholders of Company B and in exchange,
Company B will give all of the shareholders of the … of company … We will give their shares to Company A. So they will give, so … or
their shares of Company B, I should say. Company B's shareholders are
going to give all of their 1,000,000 shares in Company
B in exchange for those 2,000,000 of Company A. So what's going to happen is
each of these shareholders of Company B are going to
get 2 shares of Company A for every 1 share of Company B. So they're going to get 2 shares
… 2 shares of A for every share of B they own and that
makes sense economically because right now on the market,
let's say that it's trading at $50 a share. It has a
$50,000,000 market cap. By offering a $60,000,000
in share, they're offering a premium. This is what will
kind of convince all of the shareholders to maybe say, "Hey,
this is a pretty good deal." "I'm getting 20% above the
market price" and when you get 2 shares in exchange for your
one $50 share, you're getting 2 shares that are right
now trading at $30 a share.

So it seems like a good
deal for you. I can exchange something worth $50 for two
things worth 30 or essentially exchange something worth
50 for something worth $60. I'm going to take it and if
they do take it, then what's essentially going to happen is,
is that those 1,000,000 shares are going to be put onto the asset side of Company A's … of
Company A's balance sheet or maybe we could just put that Company B is now here, because
all of the shares are here. It's not completely owned
and the company was able to do that by issuing these
shares. The other option, they could have issued … They
could have sold those shares in the market, raised
$60,000,000, then given the $60,000,000 directly to the
Company B's shareholders and then it would have
had the exact same effect..

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