Equity value / Cash / Enterprise value

enterprise value is only 60 so yes

In the example you gave, EV is actually 60.

The company currently 'costs' 100 in the marketplace, but if you were to buy it you would also be getting the liability of 10 in debt but the asset of 50 in cash. Therefore the 'true' cost of that company is 100 - 50 + 10 = 60.

1) Cash reduces Enterprise Value because it is something positive that you gain from the company. Think of it this way, you have two companies both with a market cap of 100. Company A has 100 cash on the balance sheet and no debt whereas company B has 100 debt and no cash. When you pay the 100 for Company A, you get a company with 100 cash so effectively you are paying 100 to gain 100, therefore the true value (or Enterprise Value) is 0. Company B on the other hand still costs 100, but you have 100 in extra liabilities to pay off so the true value is 200.

2) A company with negative net debt will always have a EV that is lower than market cap (assuming no funny stuff with pension obligations, minority interest etc.). See above for the reasoning. Lets look at the numbers in your example.

Company Balance Sheet

• Cash = 50
• Debt = 10
• Equity = 40

Now, lets say you buy this company for 110 using 70 in cash and 40 in debt. You are gaining 50 in cash and 10 in debt so now your total cash is -70 + 50 = -20 (i.e. your cash position has decreased by 20 as a result of the purchase). Although you have acquired 50 in cash, you had to spend 70 to get it so you've actually lost 20. Your debt is now 40 + 10 = 50.

Nevertheless, you still have 50 sitting there in cash so you could go and pay off all the debt to leave you with 10 cash and 0 debt.

Thanks a lot for that Asatar!

So when a company is valued, then it makes no sense to use EV then? Say for example you do trade comps study, and use EBITDA multiples to get EV as say 60. When you subtract debt (10) from that you'd end up with just 50 equity value? But the market cap was 100!

Am I missing something?

Also will a lower EV than equity (holding cash) make it a potential acquisition target cause the acquirer can pay off their LBO debt from the cash?

Thanks!

One more thing: When they talk about M&A deals in the news and say "they have decided to pay 1 dollar per share for X company, valuing the company at 100 dollars" they really just mean the equity value right? How is that correct, since the company could have debt which makes it even more 'valuable' than the equity value?

And another: If a company pays back its debt through good business, then that actually brings down its enterprise value? (Cost of acquiring the company) Isn't that counterintuitive cause a company that is able to pay back its debt should actually be worth more!