This is just one in the “I’ve Always Wondered” series. This series will answer all your questions about the world of business, big and small.What is recycling worth it? or how to store the brand pile up name brand?See more in the series here.
Listener Stephanie Gilliam from Florence, Alabama asks:
How are companies evaluated? For example, if one company buys another, who decides the price? What are the costs involved? What is the profit price of
There is no magic formula for valuing a company’s true value. If there is such a thing as “true value,” it can be much higher or lower than the company’s selling price.
“This is more art than science. I wish there was some kind of formula that you could just plug in and be sure that’s how you measure your business,” says Professor Brian Quinn of Boston College Law School. . “But I find that whenever anyone evaluates a business, they take multiple approaches and make a lot of assumptions about the future. Then they draw a line in the sand and stand there.”
These valuations also relate to whether a company is public or private, according to financial experts.
When it comes to publicly traded companies, value starts with their share price. Stock prices are set by buyers and sellers trading shares on a daily basis, Quinn explained. The price of a stock multiplied by the number of shares defines the value of a company at a given moment and will continue to fluctuate as the trading process progresses.
The stock price shows how the market values the company. But to persuade a company’s management and major shareholders to sell to an acquirer, the buyer usually needs to offer more than market value. This is the so-called acquisition premium.
“That’s basically the beginning of the negotiations,” Quinn said. “And the negotiation really goes like this: ‘The market is saying your company is worth X. To give up what you think the company is actually worth, How much more than X do I have to pay?”
For Twitter: “Elon Math”
Elon Musk’s infamous attempt to buy Twitter has been one of the most high-profile deals of the past year. He originally offered to buy the company for $54.20 a share in a deal worth $44 billion. He has since tried to abandon his contract, claiming Twitter did not provide enough information about the number of spam and fake accounts on its platform.
Weeks before Twitter announced the deal, the stock had closed at $38 a share.
Quinn said Musk likely arrived at that price because he asked his banker, or possibly himself. Is a number that makes Twitter say yes and ends in 420 better than Twitter’s current stock price? (In other words, it’s a weed joke.)
“My guess is that’s basically how he came up with that number,” he said. “If he gives them 42, they’ll say, ‘We’re trading at 38, but that’s not enough.’ The next increment according to Elon Musk’s calculations is $54.20 for him.” .”
And since Twitter was trading above $70 a share at some point last year, the company may have asked itself: said Quinn. “And they probably came to the conclusion that the odds were low.”
This is a case where getting to stock prices was “the antithesis of science,” Quinn said. “It’s Elon’s math increment.”
private equity buyers
There are different approaches for each type of buyer. For example, private equity buyers will try to figure out how much debt they have to take on when considering the price to offer, Quinn said. PE firms are usually focused on obtaining investment rights in or outright acquisitions of publicly traded companies.
“They don’t want to put themselves in a position where they pay the company so much that the company doesn’t generate enough revenue to pay off the debt, so they are very concerned about what it takes to pay off the debt. I’m focused on,” he said. “So if you look at private he whole equity, buyers there tend not to generate exorbitant valuations because they are very tied to models and funding needs.”
Quinn said interest rates have been so low for most of the last decade that private equity buyers have been able to pay higher prices, but as rates rise, PE players have a tighter grip on the checkbook. I expect there to be.
For private companies, the lack of stock prices makes it even more difficult to assess their value.
Acquisition prices for privately held companies are typically based on key factors such as the historical profitability of the business, the industry and market in which the company belongs, and projected future earnings growth capabilities, said Brian Price, President and CEO. says. Chief Operating Officer of Messilow Investment Banking. Intangible assets such as a company’s image and brand are a big part of its potential success.
Mr. Price added that privately held companies typically make secret sales pitches to potential buyers. He explained that if owners are interested in selling, they may have a price in mind, but it’s up to the market to meet that price.
In some cases, the private company’s value far exceeds its selling price. Take Instagram, which Facebook acquired in 2012, for example, Quinn said.
“When Facebook bought Instagram for $1 billion, Instagram had 11 employees and no profit,” he noted.
Nevertheless, Instagram co-founder Kevin Systrom demanded $2 billion from Facebook’s Mark Zuckerberg during negotiations. However, Zuckerberg was able to push the amount down to his $1 billion and close the deal.
Six years later, Instagram, an integral part of the world’s largest social media company, was worth over $100 billion.
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