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How will CVS be able to buy Aetna for 69 billion if CVS only has 3 billion in cash without borrowing a large amount of money? I understand that a company can trade for a multiple larger than 1 of their assets but how can they buy other companies which cost much more than their assets? The market cap of CVS is 76 billion. This is what CVS shareholders currently are worth. How can they spend 69 billion of this and still own CVS? Wouldn't they have to give Aetna almost all of their CVS equity in exchange for Aetna's equity?

One way this would make sense would be if it is more of a merger and that Aetna shares will become CVS shares. So the value of the new CVS shares will be worth about the same as the value of the current CVS shares and the current Aetna shares. There would simply be more shareholders in the new company - all of the existing CVS shareholders plus all the existing Aetna shareholders.

In this case, I suppose I could buy a large company like Google even if I only had a company with a market cap of 1 million. Google's shareholders would simply own virtually all of the new combined company.

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  • $\begingroup$ They almost certainly borrowed it. $\endgroup$ – ThisIsNoZaku Dec 4 '17 at 16:10
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The deal is a mixture of cash and shares. Existing CVS shareholders get some cash, plus some shares in Aetna. It is likely that they would borrow in the bond market to raise the cash.

Yes, existing Aetna shareholders end up diluted. Ownership percentages in the combined firm will reflect the terms of the share conversion. The cash payment is there to reduce the dilution of Aetna shareholders, as it means that CVS shareholders get less Aetna shares.

You would only be able to take over a large firm as a small firm if the large firm’s shareholders want shares in a company that is managed by yourself. Unless you have a stellar reputation as a manager, why would they want that?

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