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Current time:0:00Total duration:3:47

Video transcript

what I want to do in this video is try to understand how one company can buy another company or could merge with another company by using its stock so if we have a situation here where company a is acquiring Company B for sixty million dollars in A's shares and we'll see is it's not going to exactly be sixty million dollars it'll depend on where companies a company a's shares trade right now they're trading at thirty dollars a share so in order to make this transaction happen in a shares what would happen is is that a says look i need to raise the equivalent of sixty million dollars in shares or i need to create the equivalent of sixty million dollars in shares if each of my shares right now on the market are worth thirty dollars a share then i can do that by creating or issuing two million shares so company a here is going to create another two million shares they're going to create another two million shares and if they wanted to do it as a cash transaction they could take these shares and sell them into the market into a secondary offering and then hopefully raise sixty million dollars in cash and then use that cash to buy Company B but this is a share offering they're not gonna do it with cash they're going to directly give assuming Company B shareholders agree to this and 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 gonna take these two million shares which right now on the market look to be worth sixty million dollars and they're going to give them to all of Company B shareholders in exchange for all of company B's existing shares so what's going to happen is company a is going to give two million 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 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 gonna give all of their 1 million shares in Company B in exchange for those two million of Company A so what's going to happen is each of these shareholders of Company B are going to get two shares of company a for every one share of Company B so they're going to get two shares two 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 million dollar mark market cap by offering a sixty million dollars in share they're offering a premium this is what will kind of convince all of their shareholders to maybe say hey this is a pretty good deal I'm getting 20% above the market price and when you get two shares in exchange for your one $50 share you're getting two 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 thirty 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 million shares are going to be put onto the asset side of company A's of company's balance sheet or maybe we could just put that Company B is now here because all of the shares are here it's now 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 sixty million dollars then given the 60 million dollars directly into the company beef shareholders and then it would have had the exact same effect