FL990
Well-known member
- Joined
- Oct 30, 2004
- Posts
- 240
Can someone explain why Express Jet was sold for the paultry cost of $133 million, with close to $100 million in the bank that would make the cost of over 200 50 seaters and over 2000 pilots for $33 million, the cost of 1 seventy seater. I'm confused as to why so cheap????
Its not exactly that simple. You have to look at several things as it is not just a matter of how much cash is on hand. You have to look at all assets and liabilities (as someone else pointed out) as well as net income (or loss) generated by those assets. In the case of XJT, they have not generated net profit for quite some time, so the company is devalued.
To give a simplistic example, lets say a person has 2 trucks that are used in a privately owned moving company. The trucks have a current value of, say $100,000 (combined) and he owes $50,000. Also, he has various other tools, office, and assets, which combined, are worth $40,000 and his liabilities (debt) on them are $10,000. The business also has $10,000 in cash. Now, the assets to liablilities would be $150,000 (assets) to $60,000 (debt) netting out at +$90,000. Problem is, the company is losing money, so he wants to sell. Now, put yourself in the BUYERS shoes. You see the books and see that all those assets are generating an annual loss, which if you purchase, you will either inherit or perhaps combine them with your current profitable moving business to expand, turning loss generating assets into profit generating assets, partly through economies of scale, and also through renegotiating contracts that the seller already has. Thus, the value of the business is subjective, both to you and the seller. Now, it comes down to what they are willing to accept to get out from under the burden of owning the assets (which again, create a loss) verses what you, the buyer, who can generate income from the assets, are willing to pay. Because the need to sell is greater than the need to buy, generally the seller is willing to sell at a discount in order to relieve themselve of this burden. This is especially true when there is not a "line out the door" to buy.
Ok, so after reading this example, its a bit less "simplistic" than I intended, but still much more so than the object of comparison.