How does market capitalization work?

Question

Okay, I would appreciate someone's help on this. Let's say that a company is traded in the stock market. This company has 1,000,000 shares, and the shares are trading at $7.00 a share. That would come to $7,000,000. Does this mean that someone could just come up with $7,000,000 and own the entire company, outright? In other words, could I buy a company that has a market cap of $7,000,000 for the price of the market cap. I don't have any money; I am just wondering how these takeovers work with the stock market. I hope this makes sense, as I am definitely a novice at investing. I read a lot about buyouts of companies, and it confuses me how someone figures the value of a company for a purchase.

Answer 1

Usually you're going to have to pay a premium over the market value of the shares to compensate shareholders for what they give up in the future, the future cash flows.  So the value, and the price shareholders would require in order to sell, would be based on the present value of those future cash flows.

Answer 2

No, you couldn't just buy it for $7mil.  The activity and interest in the company itself would raise the share price significantly.  If a company or individual has the cash and wants to buy a company, they can to it two ways, make a tender offer or attempt a hostile take-over.  The tender is the most common way, where the buyer makes a shareholder offer at a premium to the market.  Sometimes that premium is significant.  The company in your example trading at $7 might fetch a tender of $9-10.  

A hostile takeover involves trying to buyout shares from individual or institutional shareholders until a controlling interest is held, then firing all the directors and replacing them with your hand picked cronies.

There's the short version LOL.

Answer 3

Just about, but not quite. :P  If the company has a $7,000,000 market cap, then it is considered to be valued at roughly that.  However, there are a few things to consider.  For instance, there are different types of shares.  There are the publicly traded shares (which you see trading in the markets), then there are privately owned shares, sometimes preferred shares, and also there are shares that the company itself owns in their treasury.  But when you see these big corporate takeovers, they are basically considering the market cap, as well as the companies assets and liabilities, and coming up with a fair price that the board of directors or shareholders will accept. For defining market caps, you can check out http://www.investopedia.com/articles/bas... and in general investopedia has some great info for novice investors.