7 ms·

How can a company that is valued at $16.6 billion with $19 billion in debt buy a company that is valued at $19.4 billion with $11 billion in debt for $34 billio

by foepys 10y ago

How can a company that is valued at $16.6 billion with $19 billion in debt buy a company that is valued at $19.4 billion with $11 billion in debt for $34 billion? From where is the money for such acquisitions coming?

op00to 10y ago
More debt?
- pjmorris 10y ago
  The real secret to making money seems to be making more money (debt).
  - deleted 10y ago
    [deleted]
  - treehau5 10y ago
    I am starting to think fractional reserve banking was a bad idea
    - pjmorris 10y ago
      If only it were that simple. Turns out that, rather than being constrained by the deposits/assets they have on hand (FRB doctrine), banks will create the loans they believe they can make, then go settle up with the central bank/regulators. See, for example, (unorthodox) economist Steve Keen [0][1] on this. [0] http://www.forbes.com/sites/stevekeen/2015/02/28/what-is-money-and-how-is-it-created/#24561cde56a3 http://www.forbes.com/sites/stevekeen/2015/02/28/what-is-mon... [1] https://en.wikipedia.org/wiki/Steve_Keen https://en.wikipedia.org/wiki/Steve_Keen
      - lsd5you 10y ago
        Yeah, that was my greatest take away from what I've read from him. Talk about the tail wagging the dog. The restrictions in this light almost do more harm than good since it exonerates the banks (or rather the system) and every time we have a crisis (after people have been making the big bucks for years) we treat it as mysterious and unrelated to the profits made in the 'good' times.
        maxerickson 10y ago
        One of the primary responses to the 2008 crisis has been to change the regulations around capital requirements for banks and other financial institutions. https://en.wikipedia.org/wiki/Basel_III https://en.wikipedia.org/wiki/Basel_III Note that even though the introduction calls it a voluntary framework, the US and EU have implemented much of it in their regulatory systems.
    - djsumdog 10y ago
      It's not just fractional reserve that's the issue. Even metalists et. al. miss the fundamental issue that debt is simply a means of control. You put someone into debt to make them slaves. Debt is also the product of war. It's been toned down in the modern western world with mergers and acquisitions, but deep down it's all the same. Read: Debt The First 5,000 Years. It's a life changing book that helps all this stuff make a lot more sense.
    - hga 10y ago
      While I agree, you don't need formal fractional reserve banking to create the same sorts of crises, see for example the various US financial panics prior to the creation of the Fed in 1913 (e.g. go to the bottom of https://en.wikipedia.org/wiki/Panic_of_1910%E2%80%9311 https://en.wikipedia.org/wiki/Panic_of_1910%E2%80%9311 and hit Show on "Banking panics in the United States").
- basch 10y ago
  how else would they acquire Frontier, Windstream, Bresnan, Matrix, UBTA-UBET? with cash?
degenerate 10y ago
They also just recently laid off 3000 employees due to a "loss of $600 million a year"... http://finance.yahoo.com/news/centurylink-lay-off-3-000-130509597.html http://finance.yahoo.com/news/centurylink-lay-off-3-000-1305... Okie Dokie
- jacquesm 10y ago
  That's precisely why this acquisition is happening now, they're not doing so well and that means they are (relatively) cheap.
  - chrishacken 10y ago
    Level 3 is doing phenomenal. I think you have this the other way around.
  - bogomipz 10y ago
    That would true if L3 was acquiring Century Link, but Century is acquiring L3. From the OPs article link: "In a memo issued to employees Wednesday, CenturyLink CEO Glenn Post said that sinking legacy revenue has resulted in a loss of $600 million a year for the company."
    - jacquesm 10y ago
      Ah, silly me! I thought there was something weird about L3 buying them but in a way it's even weirder to see it happen the other way around. Thanks for the correction.
csl 10y ago
I'm not a finance guy, but isn't that just econ 101? Your company is valued at X, you take on Y in loan and invest some of that into, e.g., buying and laying fiber. Your company will now be valued at X+f*Y, where f is some adjustment factor. E.g. you may not get the same money back if you sold the fiber today. On the other hand, that fiber is projected to earn you some money over time. I do agree those are huge figures, but it could make sense.
anton_tarasenko 10y ago
The acquirer issues new shares and gives them to the acquiree's shareholders in exchange for their stake. In this case, the acquirer also buys out the acquiree's debt. This part of the deal is funded by a loan from Bank of America and Morgan Stanley.
caminante 10y ago
I think you're confused about "value." CTL isn't valued at $16B. That's only the market capitalization of its common shares outstanding. LVLT market cap = $19.4B LVLT assets = $24.1B (as of FYE15) CTL market cap = $16.5B CTL assets = $47.6B (as of FYE15) This deal's ~$10B cash + ~$15B stock (edit: based on diff. article from wsj[0] It's $34B if you include $10B in LT debt.) CTL needs to raise cash and issue/buy-back shares. Lots of options, but I'm sure they already have creditors lined up. On an unrelated note, CTL has $20B in goodwill on its balance sheet. Wow... edit: [0] http://on.wsj.com/2f0DDdj http://on.wsj.com/2f0DDdj
- grosbisou 10y ago
  I never quite understood how goodwill is calculated. I mean, I can understand how ATVI (Activision) or HAS (Hasbro) can have big "goodwill". But it doesn't make sense for CTL. Do you have any explanation?
  - caminante 10y ago
    I think of goodwill as the premium you pay over the book value of an asset. It sounds like CTL will take on some goodwill in this deal. Likely, CTL views LVLT as having intangibles -- e.g. strategic regulatory relationships, exclusive fiber contracts, employee culture, etc.
  - kgwgk 10y ago
    It's simply the difference between the money you have paid when acquiring other companies and the value of the business you were acquiring from an accounting point of view (including tangible assets and also intangible assets that can be identified and valued).
  - dkrich 10y ago
    It's BS assets that companies use to add phantom value to a balance sheet with things like "brand value" and "intellectual capital". There's no way to assess an actual value, so a lot of companies give outlandish valuations to themselves to make themselves appear more valuable than they are. Some people will disagree with that, but that's the reality. There are of course a lot of companies that have extremely valuable brands and IP, but those tend to trade at pretty fair market valuations and don't have an unusually high percentage of goodwill relative to the rest of their assets. In the case of CenturyLink, that would be a major red flag to me.
TorKlingberg 10y ago
I am no expert but I will try. First, there is no strict separation between acquisitions and mergers. It is often somewhere in between. If CenturyLink is valued at $16.6 billion with $19 billion in debt, that means the company without debt would be worth $35.6 billion. Likewise Level 3 without debt would be worth 19.4 + 11 = $30.4 billion. The article says that "the value of the deal includes assumed debt", so they are really just paying 34-11= $23 billion for the Level 3 stock (I think). It also says they are getting $10.2 billion in new debt, meaning they are issuing ~$13 billion worth of new CenturyLink stock, and giving that to current Level 3 shareholders. If I calculated things right, CenturyLink shareholders will own about 56% of shares in the combined company, with Level 3 shareholders getting 44% plus some cash. The combined company will be worth about $26 billion, and have about $40 billion of debt, so the banks will wield quite a lot of power.
mathattack 10y ago
As another poster mentioned, in this case the asset values of the acquirer are bigger. But smaller companies buy bigger companies even without that. In general they just need somebody to fund the acquisition either through debt (they borrow the money) or equity (they issue more stock). Generally it has to be done with debt. The reason it can work in telecom is that business tends to be very recurring revenue so people are willing to lend them money. (Their recurring revenue looks like a bond) An investor can see that two companies have similar businesses and economies of scale, and they want the more efficiently run one to be the acquirer, even if it's the smaller one.

by foepys 10y ago

op00to 10y ago

More debt?

pjmorris 10y ago
The real secret to making money seems to be making more money (debt).
- deleted 10y ago
  [deleted]
- treehau5 10y ago
  I am starting to think fractional reserve banking was a bad idea
  - pjmorris 10y ago
    If only it were that simple. Turns out that, rather than being constrained by the deposits/assets they have on hand (FRB doctrine), banks will create the loans they believe they can make, then go settle up with the central bank/regulators. See, for example, (unorthodox) economist Steve Keen [0][1] on this. [0] http://www.forbes.com/sites/stevekeen/2015/02/28/what-is-money-and-how-is-it-created/#24561cde56a3 http://www.forbes.com/sites/stevekeen/2015/02/28/what-is-mon... [1] https://en.wikipedia.org/wiki/Steve_Keen https://en.wikipedia.org/wiki/Steve_Keen
    - lsd5you 10y ago
      Yeah, that was my greatest take away from what I've read from him. Talk about the tail wagging the dog. The restrictions in this light almost do more harm than good since it exonerates the banks (or rather the system) and every time we have a crisis (after people have been making the big bucks for years) we treat it as mysterious and unrelated to the profits made in the 'good' times.
      - maxerickson 10y ago
        One of the primary responses to the 2008 crisis has been to change the regulations around capital requirements for banks and other financial institutions. https://en.wikipedia.org/wiki/Basel_III https://en.wikipedia.org/wiki/Basel_III Note that even though the introduction calls it a voluntary framework, the US and EU have implemented much of it in their regulatory systems.
  - djsumdog 10y ago
    It's not just fractional reserve that's the issue. Even metalists et. al. miss the fundamental issue that debt is simply a means of control. You put someone into debt to make them slaves. Debt is also the product of war. It's been toned down in the modern western world with mergers and acquisitions, but deep down it's all the same. Read: Debt The First 5,000 Years. It's a life changing book that helps all this stuff make a lot more sense.
  - hga 10y ago
    While I agree, you don't need formal fractional reserve banking to create the same sorts of crises, see for example the various US financial panics prior to the creation of the Fed in 1913 (e.g. go to the bottom of https://en.wikipedia.org/wiki/Panic_of_1910%E2%80%9311 https://en.wikipedia.org/wiki/Panic_of_1910%E2%80%9311 and hit Show on "Banking panics in the United States").
basch 10y ago
how else would they acquire Frontier, Windstream, Bresnan, Matrix, UBTA-UBET? with cash?

degenerate 10y ago

They also just recently laid off 3000 employees due to a "loss of $600 million a year"... http://finance.yahoo.com/news/centurylink-lay-off-3-000-130509597.html http://finance.yahoo.com/news/centurylink-lay-off-3-000-1305... Okie Dokie

jacquesm 10y ago
That's precisely why this acquisition is happening now, they're not doing so well and that means they are (relatively) cheap.
- chrishacken 10y ago
  Level 3 is doing phenomenal. I think you have this the other way around.
- bogomipz 10y ago
  That would true if L3 was acquiring Century Link, but Century is acquiring L3. From the OPs article link: "In a memo issued to employees Wednesday, CenturyLink CEO Glenn Post said that sinking legacy revenue has resulted in a loss of $600 million a year for the company."
  - jacquesm 10y ago
    Ah, silly me! I thought there was something weird about L3 buying them but in a way it's even weirder to see it happen the other way around. Thanks for the correction.

csl 10y ago

I'm not a finance guy, but isn't that just econ 101? Your company is valued at X, you take on Y in loan and invest some of that into, e.g., buying and laying fiber. Your company will now be valued at X+f*Y, where f is some adjustment factor. E.g. you may not get the same money back if you sold the fiber today. On the other hand, that fiber is projected to earn you some money over time. I do agree those are huge figures, but it could make sense.

anton_tarasenko 10y ago

The acquirer issues new shares and gives them to the acquiree's shareholders in exchange for their stake. In this case, the acquirer also buys out the acquiree's debt. This part of the deal is funded by a loan from Bank of America and Morgan Stanley.

caminante 10y ago

I think you're confused about "value." CTL isn't valued at $16B. That's only the market capitalization of its common shares outstanding. LVLT market cap = $19.4B LVLT assets = $24.1B (as of FYE15) CTL market cap = $16.5B CTL assets = $47.6B (as of FYE15) This deal's ~$10B cash + ~$15B stock (edit: based on diff. article from wsj[0] It's $34B if you include $10B in LT debt.) CTL needs to raise cash and issue/buy-back shares. Lots of options, but I'm sure they already have creditors lined up. On an unrelated note, CTL has $20B in goodwill on its balance sheet. Wow... edit: [0] http://on.wsj.com/2f0DDdj http://on.wsj.com/2f0DDdj

grosbisou 10y ago
I never quite understood how goodwill is calculated. I mean, I can understand how ATVI (Activision) or HAS (Hasbro) can have big "goodwill". But it doesn't make sense for CTL. Do you have any explanation?
- caminante 10y ago
  I think of goodwill as the premium you pay over the book value of an asset. It sounds like CTL will take on some goodwill in this deal. Likely, CTL views LVLT as having intangibles -- e.g. strategic regulatory relationships, exclusive fiber contracts, employee culture, etc.
- kgwgk 10y ago
  It's simply the difference between the money you have paid when acquiring other companies and the value of the business you were acquiring from an accounting point of view (including tangible assets and also intangible assets that can be identified and valued).
- dkrich 10y ago
  It's BS assets that companies use to add phantom value to a balance sheet with things like "brand value" and "intellectual capital". There's no way to assess an actual value, so a lot of companies give outlandish valuations to themselves to make themselves appear more valuable than they are. Some people will disagree with that, but that's the reality. There are of course a lot of companies that have extremely valuable brands and IP, but those tend to trade at pretty fair market valuations and don't have an unusually high percentage of goodwill relative to the rest of their assets. In the case of CenturyLink, that would be a major red flag to me.

TorKlingberg 10y ago

I am no expert but I will try. First, there is no strict separation between acquisitions and mergers. It is often somewhere in between. If CenturyLink is valued at $16.6 billion with $19 billion in debt, that means the company without debt would be worth $35.6 billion. Likewise Level 3 without debt would be worth 19.4 + 11 = $30.4 billion. The article says that "the value of the deal includes assumed debt", so they are really just paying 34-11= $23 billion for the Level 3 stock (I think). It also says they are getting $10.2 billion in new debt, meaning they are issuing ~$13 billion worth of new CenturyLink stock, and giving that to current Level 3 shareholders. If I calculated things right, CenturyLink shareholders will own about 56% of shares in the combined company, with Level 3 shareholders getting 44% plus some cash. The combined company will be worth about $26 billion, and have about $40 billion of debt, so the banks will wield quite a lot of power.

mathattack 10y ago

As another poster mentioned, in this case the asset values of the acquirer are bigger. But smaller companies buy bigger companies even without that. In general they just need somebody to fund the acquisition either through debt (they borrow the money) or equity (they issue more stock). Generally it has to be done with debt. The reason it can work in telecom is that business tends to be very recurring revenue so people are willing to lend them money. (Their recurring revenue looks like a bond) An investor can see that two companies have similar businesses and economies of scale, and they want the more efficiently run one to be the acquirer, even if it's the smaller one.