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Current time:0:00Total duration:4:04

Video transcript

we finished the last video with the scenario where company a wants to buy Company B but they're not going to do it with cash they're going to do it with their shares so the issue a press release saying that Company A intends to acquire Company B for sixty million dollars in A's shares and they want to give it a price they want to give a price that's a premium to company B's current market cap so that it's compelling so that the shareholders of Company B want to do it it's like wow that's a that's a twenty percent premium to our current market cap so we're willing to do it but since this is a share transaction Company B shareholders won't exactly get sixty million dollars what's going to happen is Company A is going to issue two million in new shares those two million new shares in theory could be worth $30 a share maybe they could sell them in the open market at $30 a share so that they would be worth sixty million dollars but instead of trying to raise the cash and then giving the cash to Company B they're just going to take those shares directly and exchange them for all of the shares of Company B essentially acquiring the company with all of those shares so every shareholder of Company B for every share they have they'll get two shares of Company A so if at the time of closing company a's stock price goes from thirty to thirty five dollars a share then the transaction price would if you think about the market value of those shares that company B's shareholders are going to get the market price would actually be seventy million dollars if the trends if the market price of Company A goes down to twenty five dollars a share then they're only going to be they're only going to get they're only going to get 50 million dollars worth of shares but what I want to think about in this situation is what should happen to company B's stock before the transaction closes while if we assume that everyone thinks the transaction is going to happen so let's let me draw a stock chart here so this is price that is price this is time right over here time and let's let me draw a company B's stock price first so let's say right now it is trading at $50 a share that is company B and right now Company A is trading at $30 a share Company A is trading at $30 a share notice even though that their share price is lower than Company B share price they have a much larger market cap because they have many many more shares so they actually are a larger company so it doesn't sound crazy for them to acquire Company B now at the time this is the day that everything was announced and let's just assume let's just assume that everyone thinks the transaction will happen so for every share of be a be shareholder has they will get two shares of company a so if company a if company a does this what should happen to company B's stock price if everyone is a hundred percent sure the transaction is going to happen well every shareholder of B is going every share of B is going to be converted into two shares of a so after this point in time if you're sure the transaction is going to happen each of these B shares should be worth two a shares so they should trade exactly at twice the value of the a shares so right when the transaction is announced if everyone assumes it's going to occur B shares should immediately jump up to should immediately jump up to $60 a share and then they should always trade they should always trade at double of a shares if they trade at less than double of a's shares then instead of buying a shares people would rather buy b shares because b or they could buy half of B shares or let's say there was someone who's going to buy two of a shares instead they'll say hey look B shares are trading for less than two of a shares but they're going to be worth two of a shares in the future because of this merger so I'm just going to buy B shares instead so there's there's no reason if everyone assumes the transactions happen that before the transaction closes that B shouldn't trade at exactly twice the stock price of a