Are Banks/Companies allowed to purchase companies with their revenue?

[intogamer]

Say that when Bank of America acquired MBNA for stock and cash at $35billion. Can the money come from the $117 Billion they had in revenue in 2006. Or does the purchase has to be netcome seeing that they included stock in the deal.

I'm thinking that using revenue would result in down the stock value? Correct me if I'm wrong...

edit: Can companies also do this also...

edit2: I don't think companies would work as they revenue would not be money they would hold....

 

[JJChicken]

cash is cash. so to answer your question, the money can come from anywhere. note that net income and revenue are arbitrary accounting-based figures due to the accrual basis of accounting. in any acqusition or any 'real' transacation, you either use cash available or take loans: accounting figures are meaningless - their only purpose is to report on periodic financial performance. the one thing to note is that 117 billion revenue does not imply 117 billion cash generated. revenue can come in many forms and may be accrued etc.

stock value is purely based on future dividends. using revenue does not reduce stock value as it does not affect FUTURE earnings (or future earning expectations). what will reduce stock value is if by reducing cash available too much or taking too many loans, the company faces liquidity problems, i.e. anything that will affect future performance. maybe for small investors, reduced revenue figures may have a negative impact but any savvy investor will look past this as it doesnt affect actual performance.

sorry if its unclear.

 

[sandorski]

How else could they do it other than by borrowing?

Answer: Yes

 

[intogamer]

Originally posted by: Allen Iverson
cash is cash. so to answer your question, the money can come from anywhere. note that net income and revenue are arbitrary accounting-based figures due to the accrual basis of accounting. in any acqusition or any 'real' transacation, you either use cash available or take loans: accounting figures are meaningless - their only purpose is to report on periodic financial performance. the one thing to note is that 117 billion revenue does not imply 117 billion cash generated. revenue can come in many forms and may be accrued etc.

stock value is purely based on future dividends. using revenue does not reduce stock value as it does not affect FUTURE earnings (or future earning expectations). what will reduce stock value is if by reducing cash available too much or taking too many loans, the company faces liquidity problems, i.e. anything that will affect future performance. maybe for small investors, reduced revenue figures may have a negative impact but any savvy investor will look past this as it doesnt affect actual performance.

sorry if its unclear.

But with a BofA they hold billions in customer's deposits which would be assets (or is this another word?) Since a bank is made up of cash assets they can essentially risk a buyout using all cash assets?

Otherwords... Can BofA risk all our money buying Microsoft with a few billion in return hoping that we don't withdrawal our accounts?

 

[intogamer]

Hmm... So Banks can do whatever with the money (typically invest) and the worse that will happen is when they file for bankruptcy?

 

[tw1164]

Originally posted by: intogamer

Originally posted by: Allen Iverson
cash is cash. so to answer your question, the money can come from anywhere. note that net income and revenue are arbitrary accounting-based figures due to the accrual basis of accounting. in any acqusition or any 'real' transacation, you either use cash available or take loans: accounting figures are meaningless - their only purpose is to report on periodic financial performance. the one thing to note is that 117 billion revenue does not imply 117 billion cash generated. revenue can come in many forms and may be accrued etc.

stock value is purely based on future dividends. using revenue does not reduce stock value as it does not affect FUTURE earnings (or future earning expectations). what will reduce stock value is if by reducing cash available too much or taking too many loans, the company faces liquidity problems, i.e. anything that will affect future performance. maybe for small investors, reduced revenue figures may have a negative impact but any savvy investor will look past this as it doesnt affect actual performance.

sorry if its unclear.

But with a BofA they hold billions in customer's deposits which would be assets (or is this another word?) Since a bank is made up of cash assets they can essentially risk a buyout using all cash assets?

Otherwords... Can BofA risk all our money buying Microsoft with a few billion in return hoping that we don't withdrawal our accounts?

no, its not their money.

 

[intogamer]

Originally posted by: tw1164

Originally posted by: intogamer

Originally posted by: Allen Iverson
cash is cash. so to answer your question, the money can come from anywhere. note that net income and revenue are arbitrary accounting-based figures due to the accrual basis of accounting. in any acqusition or any 'real' transacation, you either use cash available or take loans: accounting figures are meaningless - their only purpose is to report on periodic financial performance. the one thing to note is that 117 billion revenue does not imply 117 billion cash generated. revenue can come in many forms and may be accrued etc.

stock value is purely based on future dividends. using revenue does not reduce stock value as it does not affect FUTURE earnings (or future earning expectations). what will reduce stock value is if by reducing cash available too much or taking too many loans, the company faces liquidity problems, i.e. anything that will affect future performance. maybe for small investors, reduced revenue figures may have a negative impact but any savvy investor will look past this as it doesnt affect actual performance.

sorry if its unclear.

But with a BofA they hold billions in customer's deposits which would be assets (or is this another word?) Since a bank is made up of cash assets they can essentially risk a buyout using all cash assets?

Otherwords... Can BofA risk all our money buying Microsoft with a few billion in return hoping that we don't withdrawal our accounts?

no, its not their money.

I'm puzzled on how banks operate. So how are they able to give out loans?

 

[sandorski]

Not all their Cash are Deposits from Customers. They actually make Profits from Revenues(Revenues are not Deposits, they are $$ made from Loans, Fees, etc).

 

[JJChicken]

ah i get you. well banks can use customers funds and they do. however, the reserve bank (or central bank - im from australia so i dont know what its called in USA - im talking about the government bank that sets interest rates) sets how much minimum percentage of customer funds a bank must keep with itself to meet customer withdrawal obligations. the fact banks must keep a minimum amount of customer funds to meet withdrawals is the very basis of monetary policy.

im not sure on whether banks can invest our funds in any financial instruments they like. but they'd never go all out and splurge on one big investment, they always want to diversify! basically, whenever they build investment portfolios, they aim to eliminate the risk involved in holding any one particular investment and reduce the risk of the portfolio to the market risk. this is achieved by investing in a variety of investments that together will reflect market movements.

 

[JJChicken]

Originally posted by: intogamer
Hmm... So Banks can do whatever with the money (typically invest) and the worse that will happen is when they file for bankruptcy?

YES. Money in a bank is NOT 100% safe, although it is very close to 100% safe. heck, government bonds arent 100% safe (like in russia the government didnt honour them)

 

[JJChicken]

Originally posted by: intogamer

Originally posted by: tw1164

Originally posted by: intogamer

Originally posted by: Allen Iverson
cash is cash. so to answer your question, the money can come from anywhere. note that net income and revenue are arbitrary accounting-based figures due to the accrual basis of accounting. in any acqusition or any 'real' transacation, you either use cash available or take loans: accounting figures are meaningless - their only purpose is to report on periodic financial performance. the one thing to note is that 117 billion revenue does not imply 117 billion cash generated. revenue can come in many forms and may be accrued etc.

stock value is purely based on future dividends. using revenue does not reduce stock value as it does not affect FUTURE earnings (or future earning expectations). what will reduce stock value is if by reducing cash available too much or taking too many loans, the company faces liquidity problems, i.e. anything that will affect future performance. maybe for small investors, reduced revenue figures may have a negative impact but any savvy investor will look past this as it doesnt affect actual performance.

sorry if its unclear.

But with a BofA they hold billions in customer's deposits which would be assets (or is this another word?) Since a bank is made up of cash assets they can essentially risk a buyout using all cash assets?

Otherwords... Can BofA risk all our money buying Microsoft with a few billion in return hoping that we don't withdrawal our accounts?

no, its not their money.

I'm puzzled on how banks operate. So how are they able to give out loans?

sorry for not all replying all in one post, didnt read these posts.

they are possible to give loans because not all customers will withdraw their money at once. say customers put 100 dollars in a bank. they may take out 10 dollars and keep the rest as a deposit. the bank can loan out the deposit (as long as it has enough funds to meet withdrawals - they do statistical analysis to determine how much funds they ll need for withdrawals).

interestingly, after the money is loaned out, it invariably comes back to the bank - e.g. in my example the bank has 90 to loan. now when people get loans they (well first year macro-economics assumes them to) re-invest them in deposits. so now the bank has 190 (100+90) though the total currency is only 100. this process keeps repeating until a specific ratio of deposits to "reserves"(funds to meet withdrawals) is met. this is a major cause of inflation and by fixing interest rates, the centeral bank tries to control inflation.

 

[intogamer]

Ah I get it now. Companies are able to use profit and loans for purchases as well as stocks aquisitions. But since banks hold cash assets, that could be used along with profits.

 

[mrrman]

our company buys companies all the time...its called a not for profit clause...to me its a loophole