However, that’s the case with businesses that are going concerns. By giving away ownership, you give future potential profits. Your calculation is simply looking at present asset values whereas the shares are a claim on the lifetime earnings of the company. Paying in shares only helps shareholders if, as ValueHunter points out, management feels that the share price is overvalued and will fall.

I have to look it up but you may want to check out one of Warren Buffett’s shareholder letters (any Buffett fan know which one?) where he says one of his greatest mistakes was paying for, I believe, Dairy Queen (?) in Berkshire Hathaway shares. The amount he paid for the company ended up being several hundread million in the end–far more than any cash amount he would have paid–because he gave away the profits earned by Berkshire.

(Having said all that, if I was Micronas and viewed Trident favourably, I would ask for shares as well. Perhaps it would have been impossible to buy Micronas without paying in shares. The fact that they had to issue warrants sort of indicates that Trident has on the losing end of the negotiating table. Who knows; but paying in shares is a bad move in general.)

“Trident will also issue warrants to Micronas to acquire up to 3.0 million additional Trident shares. One million warrants will vest on each of the second, third and fourth anniversaries of the closing of the acquisition, with exercise prices of $4.00 per share, $4.25 per share and $4.50 per share, respectively.”

I think this paragraph describes the due diligence taken into account by both parties of the acquisition. Obviously Micronas Semiconductor isn’t going to give away $35 Million in revenue for $11 Million is stock. What would they have to gain by dong so? They’ve obviously valuated the business at least $4.00 per share. That would give them something to gain if it hit that target in the near future. So, TRID is getting $35 Million of leverage and it is only costing them $11 Million to do so and Micronas is taking a huge discount to their worth initially because they have a strong feeling that their newly acquired stock is worth at least $4.00 per share. What does this do for the shareholder who bought in at $1.30 per share? Puts a hell of a big smile on my face

Dilution of shares:

$200 Million in cash
- $56.37 Million in TL
= $143.63 Million
/ 62.86 million shares + 7 Million extra issued

= Share Price of $2.06 per share in cash

Dilution of hard assets

$200 Million in cash
- $11 Million (initial cost of acquiring the business, I believe this number would be higher if it was a cash deal)
- $56.37 Million in TL
= $132.63 Million
/ 62.86 million shares

= $2.11 per share in cash

So, you get a whopping 2.42% immediate advantage to purchasing the business with hard assets rather than shares. Not a big enough difference to make a difference in my opinion. Further more, with that little of difference, I’ll gladly pay for the hamburger next Tuesday in order to eat it today.