EV bridge question
I have a doubt regarding exercises on TEV/EqV bridge that I was asked in an interview:
Why do Equity Value on the bridge stays the same when I overpay for the Shareholder's Equity of the target? While it decreases (making more sense to me, as you account for a 'distruction' of value) when you overpay for the Enterprise Value of the target?
See the below examples?
- Let’s say the company raises $200 million in Debt to acquire another company for a
purchase price of $200 million. The other company’s Common Shareholders’ Equity is $100 million.
Breaking Into WallStreet questions say that you EV increases by 200, because Goodwill and other intangibles are both core business assets, therefore reflected in TEV.
- But let's say a company pays $200 million in debt to acquire another company's TEV= $100 million.
In this case EV pro forma would be the sum of the two enterprise values. Hence:
TEV: + 100; Net debt: + 200; EqV reflects overpaying by decreasing:-100.
Can't get my head around the reason of this one, I understand it is for the fact that TEV of the target includes non-core assets whereas EqV does not, but any clarification would be great.
Cheers,
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