For instance, when Disney bought Fox for $71.3 billion, how did they do that? I assume they did not have $71.3 billion buried in the ground. And if its just a loan from a bank, is there a really ever a limit to what a bank could lend out technically?
In: Economics
There are all sorts of venues from which they can borrow, whether through a bond issue, borrowing from a traditional bank, loan syndication (where a bank goes out and finds a number of investors who want to invest). Such giant loans are backed by assets (movie rights and such) and anticipated revenues generated by company post-purchase.
The bank looks at the their loan application.
The loan application is going to include things like:
The applicants current on hand cash (In the case of Disney 15 billion dollars).
The applicants annual revenue and expenses.
The expected revenue of the property being purchased.
There will be other factors and items included, this is simplified.
How much of a down turn the company would have to have in order to not be able to make good on its debts.
A detailed business plan that details how they intend to actually make the money they are estimating and what the contingencies are.
The bank then says: Well you expect to make a profit on the property you are making and you have included a detailed financial statement of your company’s position and the financial state of the company you are purchasing and how you intend to use the property you are purchasing to make money and pay back the debt. **We feel that the risk in lending you this money is well within our risk tolerance.** Here is a check.
On the other hand, if Disney had just walked in and just said “Can we have 70 billion dollars on my good looks”, the bank would have politely suggested they come back with a more detailed loan application and shown them the door.
Big corporations borrow their money from investors through bond issues and term loans (those loans are borrowed from multiple large investors, banks or other entities, rather than issued by a single bank/lender)
Most of those big big deals are ‘Cash and Stock’
Most of Disney’s purchase was giving Fox shareholders stock in Disney.
But most corporate loans are bonds, Disney in particular has almost $40 billion of bonds outstanding.
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