Hi Jeff, I think I'll still post here from time to time as this is still my favorite thread. As far as your open market theory, when one company takes a look at another company, they may indeed look at what it trades for on the market to get a quick rule of thumb for how much they may have to pay. However, when deciding whether to make the purchase or not, they go through a significant amount of due diligence, which includes many things including proving out A/R and assets, doing a grievance search, and peforming a valuation analysis. In their valuation analysis, they do all the valuations that you can think of: market comparables, stock market capitalization, discounted cash flows, multiple of sales, multiple of book value, etc. Then the lawyers get in a room and start the bargaining process to see what price can be agreed upon and what type of purchase it will be (stock, cash, leveraged, or some hybrid). The wouldbe acquirer has a maximum price he's willing to pay based on what they think the company is worth discounted by a hurdle rate (the rate at which the acquirer wants to get as a return on his investment). My point is that the maximimum price they are willing to pay usually is not just a factor of market capitalization. Right now, Cisco is in no danger of being acquired. First, they don't have any competitors that could swing a purchase of that size. Second, analysis would prove to those wouldbe acquirers that at these levels, Cisco wouldn't generate enough free cash to give a good return on their investment. Third, Cisco most probably has some poison pill arrangements in place to discourage takeovers. Fourth, current management is loath to do any mergers with like-size companies.
My second point above is usually one of the biggest reasons one company will acquire another. Is it accretive? Will the acquired company throw off enough free cash flows to make it worth my while at the price I have to pay for it? Are there synergies that will allow the combined entity to save money through economies of scale or through good technology fit? Blah blah, but you get the picture. Market cap is important, but only insofar as it is reasonable with respect to cash flows - at least to a wouldbe acquirer. |
