Figuring out the value per share of common equity for publicly traded companies is trivial, since all you have to do is look at the market price of the company's stock. For private companies, however, figuring out the value per share of common equity can be much more difficult because of the lack of a market for shares. The best chance to figure out an implied value per common equity share is when the company gets a buyout bid.

Looking at the whole deal
At first glance, you might think that calculating the implied value per share would be easy: just take the proposed purchase price and divide it by the number of shares the target company has outstanding. However, that is only the case in deals involving companies with unusually simple capital structure that have no outstanding debt, options, preferred shares, or other obligations.

For instance, take a situation in which an acquiring company offers $10 million to buy a target company with 1 million shares outstanding and $2 million in debt. The key question is whether the acquirer will agree to assume that debt. If not, then only $8 million of the offer will go to the target's shareholders, with the other $2 million necessary to pay off the debt. That will make the implied value $8 per share. By contrast, if the acquirer does assume debt, then the implied value will be $10 per share, because selling shareholders won't have to pay off the debt themselves.

Similar complexities arise in dealing with preferred stock. If there are outstanding shares of preferred stock, then the deal will specify how those shareholders are treated and whether they'll be paid off immediately as part of the total buyout bid. If some of the money gets diverted from common shareholders to go instead to preferred shareholders, it reduces the implied value per share of common equity.

Finally, be sure to consider options. Some deals will make options immediately exercisable in a merger situation, in which case you'll want to consider the impact of a sudden increase in outstanding shares on the per-share buyout bid.

Doing the calculation
In order to calculate the implied value per share of common equity in a merger situation, start with the stated buyout amount. Then subtract any portion of the buyout that goes to stakeholders other than those who own common shares. Finally, with whatever's left, divide by the number of common shares outstanding. The result will be the value per share of common equity that's implied by the given buyout bid.

Valuing private companies can be tricky. Merger situations give investors a great window into valuation by providing the means to calculate an implied value per share based on what the acquiring company is willing to pay.

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