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Comment by hn_throwaway_99 | Hacker News Reader

Folks need to understand the difference between market cap and enterprise value. To buy a company, you don't only have to buy the shares of stock, you also have to assume all their liabilities.

True, liabilities should be less than assets. But that's why banks are freaking out in the first place.

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One of the things that made it harder to convince other banks to buy SVB is the memory of 2008 when banks who bought other banks inherited all their liabilities and lawsuits.

> Why isn’t Dimon buying S.V.B.? He has complained about the headaches of buying Bear Stearns and Washington Mutual at the government’s behest in 2008, having spent years fighting litigation and paying fines for those firms’ bad behavior. Bank executives who were around back then remember that.

https://marginalrevolution.com/marginalrevolution/2023/03/se...

It's good to want banks to be punished for causing problems, but if that punishment also applies to people who try to rescue the bank, then nobody is going to try to solve the problems.

> One of the things that made it harder to convince other banks to buy SVB is the memory of 2008 when banks who bought other banks inherited all their liabilities and lawsuits.

Also, no Hank Paulson there with a shotgun to get the job done this time.

*bazooka

If you purchase all of a company's stock, assuming that confers you 100% of voting rights, then you do "own" the company by most definitions, and certainly by the definitions that creditors would use when they demand their money back from your liabilities. In practice, once you own all those shares, you control the board of directors and can vote on how to handle liabilities, for example by using mechanisms like leveraged buyouts to (legally) shift liabilities to a new entity.

The trouble is that to purchase 100% of shares of a company, someone has to sell those shares to you. Just because the stock tanks to $0.01 doesn't mean the board members will sell you all of their shares and voting rights. They don't have to accept your offer.

For the public company: you pretty much can just buy it, barring stuff such as poison pills or regulatory approvals.

Doesn't seem to be true.

Surely the stocks are held by all kinds of people and institutions and only a very small fraction of the shares are up for sale at any given time. Am i missing something?

Also the stockprice listed is the price of the cheapest share currently offered, isn't it?

> Surely the stocks are held by all kinds of people and institutions and only a very small fraction of the shares are up for sale at any given time. Am i missing something?

Well, when the price goes up from your buying, more of those shares become available.

> Also the stockprice listed is the price of the cheapest share currently offered, isn't it?

Well, probably last successful transaction, but these are more or less the same number. What you're getting at is that buying the stock piecemeal will drive up the price, which is true.

Usually when you want to buy the entire company, you don't buy it piecemeal on the open market. You offer a premium to the market price to the board and the board decides whether or not to propose the deal to shareholders for approval (tender offer). Or you could do a hostile bid which is where you go directly to shareholders.

Shifting liabilities to a new entity — some company tried that recently and the courts struck it down.

I thought this was a fairly standard practice as part of leveraged buyouts? I'm no private equity investor though so no idea.

This was it: Johnson & Johnson https://www.reuters.com/legal/jjs-ltl-units-bankruptcy-dismi...

This case is specifically about this strategy in bankruptcy but I wouldn't be surprised to see this decision propagate more broadly.

> J&J is among four major companies that have filed so-called Texas two-step bankruptcies to avoid potentially massive lawsuit exposure. The tactic involves creating a subsidiary to absorb the liabilities and to immediately file for Chapter 11.

Ah, but you don't have to actually assume liabilities, you can only lose as much as the purchase price.. So buying a company with 10 billion in debt and 10 billion in cash for $1 isn't $1 overpriced. It is an opportunity to take a 10 billion bet with "heads I win, tails I walk away chuckling."

That’s not how it works. You assume the liabilities too.

Stock owners are not liable. The company is. Right?

When the stock owner is another company that has a majority (or 100%) stake it's usually considered one company for liability purposes, at least in the U.S.

Otherwise every company would set up dozens of intermediary shell companies to protect every valuable subsidiary in the hopes of a favorable court ruling if things go belly up.

that kind of is how hollywood and vc firms work

No, that's definitely not how VCs work, there's a reason why no singular firm buys up more than half of any company.

And probably other folks more knowledgeable on how Hollywood legalities work can confirm a similar taboo exists there.

Is it hard to sell half a company you bought for a $1? Seems like more of a psychological problem than a technical one..

I mean sure the whole market could realize your purchase was an absurd liability, but they would still be immune as long as they only own their fraction, so unless the whole market prefers your bankruptcy over a free bet..

Can you explain what you mean by “assume all their liabilities” in practical terms?

They owe folks money. If you buy them, then you owe those folks that money. So you'll have to pay the purchase price, and then pay the company's debts.

How is this the case whenever apparently Credit Suisse investors are not made to pay Credit Suisse debts?

E.g. Saudi National Bank, who announced no more cash to CS

That's the whole point of corporations - that the only thing available for debts is the assets and equity of the company, not the assets of individual shareholders, execs or directors (unless there are some very specific circumstances, which is called "piercing the corporate veil).

Practically: CS may owe money, CS may get sued, CS still needs to pay suppliers and people...

You want to buy Bob's Delicatessen, a business which makes a tidy profit with their storefront schlepping sandwiches to the local cube farm dwellers.

Bob's Deli has a number of on-going costs, like the lease for their storefront, contracts with suppliers to deliver goods, maybe a business loan from a local bank that got them going in the first place.

These are all liabilities that you, the new buyer, must take on. You can't just rule from on high and say these business deals were with the old Bob's Deli and go away with the purchase. An example of a purchaser (apparently/allegedly) trying to say that former liabilities no longer apply: Disney buying up Fox, or Lucasfilm, and saying they no longer have to pay royalties out to authors who wrote novelizations of films, or expanded universe properties[1]

[1]https://www.theverge.com/2020/11/19/21578621/disney-alan-dea...

Or, more recently, Elon Musk deciding that liabilities that Twitter took on before he purchased it no longer apply to Twitter under his ownership:

https://arstechnica.com/tech-policy/2023/01/twitters-landlor...

https://www.nytimes.com/2023/02/03/technology/twitter-elon-m...

Those are liabilities of the business; not you personally, the controlling shareholder. If the business's liabilities exceed its assets, you take the business through bankruptcy; you are not personally liable (generally, with limited exceptions).

Sure, I could have been clearer but in my example "you" meant the entity acquiring ownership of the business. Not the reader or a specific person.

I don’t think the acquiring entity takes on the liabilities of the business unless it’s a merger rather than a subsidiary.

A company exists, and it has a loan on a building that it uses.

It does nothing else, the building is worth $100m and the loan amount is $95m.

So the company is worth $5m (the difference) and you could buy it for about that much (ignore whatever the company might DO with the building).

But now the real estate market crashed, the building could only be sold for $80m, but the loan is still $95m. Now the company is worth -$15m. So you could buy it for a dollar, but you still have a building worth less than the loan on it.

If real estate goes back up then you're quids-in, if it doesn't, worst case scenario you just walk away having lost $1. You personally may have $20m in assets, but those are separate from the company you just bought.

Buy it sell the building immediately, transfer the money to one of your other companies, then file for bankruptcy.

/s in case anyone was wondering.

buy company

pilfer physical assets by selling them to companies you control

wait for company to go bankrupt anyway

You might make a great Hungarian politician...

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