0

This question is a continuation of these two earlier questions:

  1. Does the concept of non-outstanding shares exist?
  2. Do share buybacks leave a company vulnerable to predatory shareholders?

I read in the opening statement of this page here:

Public vs. Private Companies

That a public company is one that has sold all or a portion of itself to the public. Let's consider the scenario where company ZZZ Inc. has only sold 20% of itself to the public in the form of 100M outstanding shares. My questions are:

  1. If I bought all 100M outstanding shares, do I still own all of ZZZ Inc.? (This is related to my Question 2. above)
  2. Let's say ZZZ Inc.'s share price is trading $1 per share, giving a market capitalization of $100M. Let's say ZZZ Inc.'s assets minus it's liabilities is $100M. Does that mean ZZZ Inc.'s Price to Book ratio is 1 (=$100M/$100M) ? The fact that only 20% of ZZZ Inc. is publicly traded does not affect the P/B ratio?

Extra

I read somewhere that whenever you see a P/B ratio of less than one, then the market believes that a company is worth less than the book value of the company. And you can buy the company for less than it's book value. All my questions are try to validate this point, and see if there are situations when it is false.

4
  • 2
    It's important to clarify whether the other 80% of shares are held by someone (e.g., insiders, which are included in outstanding shares) or held by the company itself (as treasury shares). You seem to imply the latter. In this case, if all outstanding shares are publicly traded, the company is actually owned 100% by the public. The treasury shares are just an accounting formality to make it easier to sell more shares to the public in the future (i.e., grow the company while diluting its ownership). – nanoman Feb 17 '20 at 20:19
  • Oh! Ok, so if YYY Inc. just bought 100M of ZZZ Inc.'s shares, but ZZZ Inc. refuses to be taken over, so ZZZ Inc. can counter this attack by converting it's remaining 400M treasury shares (the 80%) to outstanding shares (which comes along with voting rights) then tell all insiders to quickly buy them up before YYY Inc. follows up with another round of purchases. Is that how a scenario can potentially unfold? – John Feb 17 '20 at 20:31
  • Or maybe my comment should be revised slightly. ZZZ Inc. would need to pre-emptively convert treasury shares to outstanding shares and tell "insiders" and allies to buy them up before YYY Inc. make their move. Treasury shares have the benefit of being used as reserve ammunition? – John Feb 17 '20 at 20:43
  • 1
    Yes, issuing additional shares can be a way to dilute an "undesirable" shareholder. But if YYY already owns 100% (or even 51%) of the outstanding shares of ZZZ, it's probably too late. YYY can replace the board of directors (which has to approve share issuance), and even the existing board has a fiduciary obligation to represent the interests of shareholders, which now means YYY. The way this can work is if before the takeover, the board adopts a binding rule that will cause the company to act against a new owner: a "poison pill". – nanoman Feb 17 '20 at 20:56

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.