So if a lemonade stand has 3bn in cash it's done pretty well selling lemonade surely?
For a less ridiculous hypothetical, we know that BBRY has $3bn in cash right now. Supposing that it instead had $10bn in cash, its valuation would not be the same, it would be $7b higher. Its stock price (and equivalently its market capitalization) would reflect that, because the stock market is a place where people who disagree about the how to value the company go to make trades they believe are favorable. People who go to the public markets and act on the belief that ($10b in cash + a niche mobile phone business) should be valued at $5b would be rare. They would also be very wrong.
The current valuation of $5b implies that the niche phone business is worth $2b and the $3b in cash is worth $3b.
No, it is what the shareholder can, in principle, "take out" of the company, appropriately discounted. For a going concern, without excess cash, that is going to be, to a first approximation, something like discounted earnings.
> So if a lemonade stand has 3bn in cash it's done pretty well selling lemonade surely?
Not necessarily. When starting a business you need cash, even pre-revenue. Even if the cash were generated entirely from the business somehow the business endeavor may no longer be valuable. Maybe people don't like lemonade anymore. Maybe lemons have gone extinct. In those cases future earnings are zero.
If someone wanted to acquire the lemonade business what would they pay? Probably not $3bn because that would just be moving numbers around (there is no reason normally to buy cash). They would pay whatever they could get out of the lemonade business proper (assets, future earnings). The $3bn would be returned to the shareholders.
It explains my perspective.
As a thought exercise, what is the relevant "price" to acquire a company when the share price has fallen to zero (just before bankruptcy)? Free is the wrong answer.
How much does it cost to acquire a lemonade stand with $1B in the bank, and a market cap of 1.000001B?
Enterprise value will give an accurate "price" in both of these examples.
I understand where you're coming from, and Microsoft may well come to decide that their best strategy is in-house hardware, but there's a major downside to such a move.
If MS did buy Nokia, they would make a guarantee to Nokia, just as Google did.
So the more debt company has, and the less cash it has, the more valuable it is? That makes no sense at all.
The market cap is the sticker price - how much it will cost to buy all the shares.
The cash the company has on hand is like a mail-in-rebate. After you've bought the company, you'll get that cash back, so you consider that rebate value against the sticker price when evaluating the price you're actually going to have to pay.
Debt is like an extra cost you also have to take on when you purchase the company - like a delivery charge. So you need to add that on to the sticker price to evaluate the true cost.
Since the true price is market cap + debt - cash, and the debt and cash are somewhat fixed, it should come as no surprise that the market cap, via the share price, adjusts itself such that the true price reflects the company's value more accurately than the market cap does.
So it's the other way round: the more debt a company of a given value has, the lower its market cap will be. Which makes more sense.