17 ms·

Imagine company A, which has no operation, only $1B in cash. How much money do you need to buy this company? The answer is zero. You borrow 1B. Buy the comp

Imagine company A, which has no operation, only $1B in cash. How much money do you need to buy this company? The answer is zero. You borrow 1B. Buy the company. Use the cash to pay back the debt. Cash has no influence (with exceptions and edge cases) on a company's enterprise value.

dpark 10y ago
If you need to borrow a billion dollars to buy the company, then you need a billion dollars to buy the company. The fact that you can use the cash the company holds to pay off the loan is irrelevant. All you did was liquidate the company. That doesn't mean it had zero value. It means that it had literally a billion dollars in value. Your broken logic could be applied to literally anything. > Imagine company A, which has no significant cash, only a $1B tire manufacturing business. > How much money do you need to buy this company? > The answer is zero. > You borrow 1B. > Buy the company. > Sell the time manufacturing business to pay back the debt. > Manufacturing capacity has no influence (with exceptions and edge cases) on a company's enterprise value. Or how about this? > Imagine a used Honda Civic, which is a car that costs $10k. > How much money do you need to buy this car? > The answer is zero. > You borrow $10k. > Buy the car. > Sell the car in parts on eBay to pay back the debt. > Car parts have no influence (with exceptions and edge cases) on a car's value. The fact that you can take out a loan to buy something, and turn around and liquidate the parts of that thing to pay back the loan does not mean the thing has no value.
- ucaetano 10y ago
  Seriously, no. Buying a Honda Civic is buying an asset which has intrinsic value, and can be used to generate value beyond the $ price. Buying cash gives you no additional value. So trust me, the amount of cash does not change Enterprise Value. If you don't believe me, read any valuation materials, such as Damodaran's.
  - dpark 10y ago
    You quietly changed from talking about stock price to talking about enterprise value, a term which is defined to exclude cash. This is extremely disingenuous. If you want to argue that there is no value in taking over a company for its cash, sure. If you want to argue that the market sees no value in cash, no.
    - ghshephard 10y ago
      I think we can all agree, that when an dividend is issued, particularly one that is significant compared to the "Valuation" of the company, that the stock price (excluding normal day-day market and stock volatility) will drop an amount very close to the amount of the dividend. So, for example, let us say that we have a nice monopolistic utility with (for the sake of argument), very little competition. For example, the Electricity and Water Utility in Dubai, UAE. Let us say that the population has stabilized, and that it has $10 Billion in cash, has a nice stable cost structure with no major depreciations in the future, and are generating $10 million in FCF and profit every year, on assets that are worth $1B, and that the risk free interest rate is 1%. If I were an investor, I would pay $11 Billion for this company. The Cash is worth $10B, and the Business is worth $1B (1% of $1B is $10 million). Now, let us say the business issues a special Dividend of $10B. Can we all agree that a rational investor, on the ex-date, would now only spend $1B on this company, instead of $11B?

dpark 10y ago

If you need to borrow a billion dollars to buy the company, then you need a billion dollars to buy the company. The fact that you can use the cash the company holds to pay off the loan is irrelevant. All you did was liquidate the company. That doesn't mean it had zero value. It means that it had literally a billion dollars in value. Your broken logic could be applied to literally anything. > Imagine company A, which has no significant cash, only a $1B tire manufacturing business. > How much money do you need to buy this company? > The answer is zero. > You borrow 1B. > Buy the company. > Sell the time manufacturing business to pay back the debt. > Manufacturing capacity has no influence (with exceptions and edge cases) on a company's enterprise value. Or how about this? > Imagine a used Honda Civic, which is a car that costs $10k. > How much money do you need to buy this car? > The answer is zero. > You borrow $10k. > Buy the car. > Sell the car in parts on eBay to pay back the debt. > Car parts have no influence (with exceptions and edge cases) on a car's value. The fact that you can take out a loan to buy something, and turn around and liquidate the parts of that thing to pay back the loan does not mean the thing has no value.

ucaetano 10y ago
Seriously, no. Buying a Honda Civic is buying an asset which has intrinsic value, and can be used to generate value beyond the $ price. Buying cash gives you no additional value. So trust me, the amount of cash does not change Enterprise Value. If you don't believe me, read any valuation materials, such as Damodaran's.
- dpark 10y ago
  You quietly changed from talking about stock price to talking about enterprise value, a term which is defined to exclude cash. This is extremely disingenuous. If you want to argue that there is no value in taking over a company for its cash, sure. If you want to argue that the market sees no value in cash, no.
  - ghshephard 10y ago
    I think we can all agree, that when an dividend is issued, particularly one that is significant compared to the "Valuation" of the company, that the stock price (excluding normal day-day market and stock volatility) will drop an amount very close to the amount of the dividend. So, for example, let us say that we have a nice monopolistic utility with (for the sake of argument), very little competition. For example, the Electricity and Water Utility in Dubai, UAE. Let us say that the population has stabilized, and that it has $10 Billion in cash, has a nice stable cost structure with no major depreciations in the future, and are generating $10 million in FCF and profit every year, on assets that are worth $1B, and that the risk free interest rate is 1%. If I were an investor, I would pay $11 Billion for this company. The Cash is worth $10B, and the Business is worth $1B (1% of $1B is $10 million). Now, let us say the business issues a special Dividend of $10B. Can we all agree that a rational investor, on the ex-date, would now only spend $1B on this company, instead of $11B?