*AV*--I want to try to answer the question that has stirred up some emotions with a real life example.
First of all, it is important to determine if a contract exists for the acquisition. If the papers are signed for $xxM and X,xxx,xxx shares of stock, the deal has a present day value as of the signing of the contract. This is a double edged sword since it could go either way. The wording of the contract is key to the value of the purchase moving forward. You must also make sure it is a contract for acquisition rather than a letter of intent subject to shareholder approval. Big difference. Even when we go out and buy houses these days, you are actually signing an earnest money agreement pending certain conditions set forth in the sales contract. Unless you are buying for cash, it always stipulates a closing date and contingewnt upon getting an appropriate mortgage committment and possibly the sale of your existing home. So, in effect, you have a contract but it does contain certain contingencies. So unless it is a straight, "I will buy regardless", you need to check if there are any stipulations.
With that said, we move onto the terms of the contract. If the contract says the purchase price is, say, $50 million in cash and securities, then at closing that is the price to be paid. If it specifies $50 million, with $10 million cash and the rest securities, the number of shares is deterimined on the date of closing. If the contract says, as you suggest, a specified amount of money and stock shares, then there is no real purchase price for the company and it is a fluid transaction with rosks on both sides.
Keep in mind, that when a deal is put together and it makes real good synergies, you would expect the price of the stock to go up in sympathy for these synergies. Combining of two organizations usually brings along significant efficiencies of scale which would drop to the bottom line. This therefore affects PE ratios and could result in increased share pricing. If the market does not see it as a good deal, the share price falls. I am almost certain this is factored into the original contract as best as possible. If the sum of the parts is worth more than the individual parts, why shouldn't both sides profit by the joining of forces.
Now for the kicker and factual story. A very shrewd friend of mine sold his company to a bigger company for a minimum set amount of shares of stock and guaranteed purchased value. In other words, he negotiated a great deal by eliminating any downside risk. The deal was a stock deal but the shares of stock would increase to meet the set purchase price but never decrease below the original share amount. The deal was set in wet cement since his x.x million shares was the minimum amount of shares he would receive. If the price of the stock fell below the set price, his number of shares would be increased to meet a certain tranaction value. If the stock were to go up before closing the deal, he would still get the 5.5 million shares.
Here is the summary of the deal:
1. The x.x Million shares were value at ~$18 when the deal was struck April 1997.
2. When the paper finally got signed and certificates transferred across the table, the stock had already traded into the low 40s and was in the high 30s that day.
3. He was not allowed to sell any shares for cash for a specified period of time. Then he could only move a certain amount of shares in a given time period. It was not until this past April that he was allowed to divest of some shares in a secondary offering. By that time the stock had fallen to the high 20s ($29, I believe). So, as high as the stock was he was unable to dump them for cash.
4. So when the secondary offering came about, he was able to participate and profit by an additional $10 on a small set of shares but had to still hold the rest of the bundle.
5. Due to the reversal in the tech sector this year, the remaining shares are presently trading below the original purchase share price. Therefore, he took a $10 profit on some shares and is sitting on close to a $2 loss on the bulk of his remaining shares.
6. This entire process covered 18 months so far. Therefore, you also need to be aware that even if the stock price goes up, it is not liquid cash. There are restrictions most of the time for unloading the shares acquired through these types of deals. This is also factored into the price of the deal at the beginning, I would hope.
Present value (after deal is announced) and future value (timeframe to convert to cash) of stock is hard to judge when putting deals like this together.
All in all, my friend made a great deal since the value of the transaction on the closing date was 100% higher than it was the day they agreed to the deal. The value of buying his privately held company was highly regarded by the street and increased share price value. This higher value to the stock benefitted the mother company since it improved their financial standing with the financial community in terms of borrowing power. It also helped raise more money for the corporate piggybank when the secondary offering was executed this past April. The company made an extra $22 million dollars in that offering probably due to the increased share price of the stock resulting from the well received acquiistion of my friend's company.
Side note: Since the stock is now down $13 from that secondary offering price, I would think that they should (if they have any of the cash on hand) repurchase those 2 million shares at today's prices.
This way, when the market recovers and the share price goes up to historic levels, they could have a follow on offering which would allow my friend to release more of his shares while the company resells the same shares for a higher premium<GGG>. Just my opinion.
In conclusion, it is very improtant to understand the real terms and conditions of the agreement. The price of the stock offered can quadruple in price after the deal is announced but it is still of no value until fter the deal is consummated and the actual exchange is made along with the expiration of the restricitve disposition timeframe requirements for selling the stock.
I would venture a guess that most stock deals would take around 15-20 years to fully dispose of all shares involved in the deal. What if the stock doesn't move and is a laggard stagnate stock or what if it falls on hard times and goes bankrupt. Stock deals do come with risks. After all, the cash, if put in the bank, would double every 6-7. Over the course of 20 years, the cash would be 8x the original value if placed in a savings account and probably higher in CDs. You cannot guarantee that the stock you received would grow 8X over that same timeframe.
That is of course, if you weren't invested in DELL, MSFT, INTC, or such<GGG>.
I hope this lends some color to this conversation since it is not a completely black and white situation. Many factors need to be considered and I just mentioned a few.
Andrew |
