From an acquisition perspective, the "price" is Market Cap + Debt - Cash. The total cost comes to just over $2B. At that price, I see it as a no brainer for Microsoft. They just need to ship a windows phone that is compatible with all the BB enterprise stuff, and IT departments will force it on the employees.
His point is that the company has a net cash position of $3bn, meaning someone who pays $5bn for the entire market cap of the company would immediately receive $3bn back in cash, making the real price effectively $2bn
But he is saying the $5bn already includes a discount for the cash you will get back. The market knows it has 3bn in cash lying around, so the market reckons that all of Blackberry's future profits and its on hand cash, are worth $8bn today, but that includes the $3bn of cash, so it adjusts the shares down to be $5bn - effectively saying the market thinks Blackberry can generate another $5bn worth of dividend-able profit for the rest of its life. For a company with an EBITDA of 1.3bn thats about 3 years.
So, the time value of money. Also, as foobarqux commented, this leads to a silly valuation of the very capitalized lemonade stand. If a similar-but-broke lemonade stand would be worth $1000, most people would be extraordinarily willing to pay $1000 for 1% of the very capitalized lemonade stand. It would make them millionaires!
Market capitalization is just the valuation implied by the current share price. (share_price * n_shares).
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.
> Err, ok I am missing something from my basic economics - I was pretty certain the market cap of a company was its projected lifetime profits.
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.
Slight problem there. If MS does this Nokia will drop Windows Phone like a hot stone, so in the gap between Nokia abandoning it because they won't want to compete directly with MS, and MS actually getting their own BB engineered phone out (likely to be several years), WP would have zero market presence. Surface has already royally pissed off MS laptop and tablet OEMs. This move would critically sour their relationship with the only viable WP hardware vendor.
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.
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.