Market Capitalization
Market Capitalization
What is Market Capitalization | Definition
This blog is an educational resource for those wanting to learn more about the private equity industry so from time to time I will offer definitions and explanations of industry concepts.
One way to measure the value of a company which is typically used by private equity firms is the target company’s market capitalization, also known as market cap. This number is a calculation of the number of shares available to the public multiplied by the market price per share.
Market capitalization is an important consideration in mergers and acquisitions because it gives the buyer an estimate of what to bid. A buyer should expect to pay a premium on the market capitalization so this number is more of a minimum price but you will probably have to pay a higher price to gain a majority interest in the firm. In some cases stockholders may be eager to unload their shares but the market is too thin, in this situation private buyers can get a lower price than what the market capitalization would suggest.
Valuation of the firm should not rely solely on its market capitalization, but also other factors such as quality of management, long-term growth potential, and how much debt the firm has. I hope this has answered the question what is market capitalization?
Market Capitalization calculation:
For a great explanation of market capitalization read Private Equity: Transforming a Public Corporation to Increase Value
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