What makes purchase equity value different from equity value?
Equity value is also known as market capitalization. It is share prices x shares outstanding.
Purchase equity value is different from that.
It has to do with the value that is attributed to equity investors in a case where the company was being acquired.
The acquirer will offer to purchase the company often at a share price above the current market price.
If UnlearnEdu trades at $10 a pop, DropoutEdu may swing by and throw in an offer to buy UnlearnEdu at $12 a pop.
Why pay $2 extra a share?
They love losing money.
No, they know that UnlearnEdu will not go through the cost and hassle of selling for a price that they are already valued at.
That’s the equivalent of me asking you if you would want to invest in my stock at $10. You can expect to sell it for $10.
You would probably say I’m crazy. Rightfully so.
Why take the risk?
You rather not invest in the stock and take the pain of opening a brokerage, transferring money to the brokerage, investing in the stock, then having to time the sale, and then having to report that information to the regulators.
It’s a pain.
Plus, there could be transaction costs associated with it.
If that’s the case, you now lose money net, rather than breaking even.
Just a $0.50 transaction cost for buying and selling the share would mean that you earned a return of -5%.
Again, why take the risk and pain? This is business. You’re here to make money. Not support a friend.
Similarly, target companies would demand a purchase price premium in order to consider M&A.
In fact, the board of directors has a fiduciary duty to sell the company for more than it is currently worth.
Otherwise, they are recklessly destroying shareholder value. And, value is being transferred from the hands of the target’s shareholders to the pockets of the acuiqrer’s shareholders.
So, the purchase equity value is equal to the offer purchase price x shares outstanding.
Bottom-line? Acquirer’s pay premiums to incentivize the target to close on the deal.
