Help - all-cash acquisition impact on equity value
Company A: EV = 100, market cap = 80, EBITDA = 10, net income = 4, EV/EBITDA = 10x, P/E = 20x
Company B: EV = 40, market cap = 40, EBITDA = 8, net income = 2, EV/EBITDA = 5x, P/E = 20x
Say company A acquires B using 100% cash. What are the combined EBITDA and P/E multiples?
I understand that combined EV/EBITDA is 10x, because A's new EV = 100 + 40 = 140 as it has 40 less in cash, so net debt increases by 40, since EV adds debt and subtracts cash, less cash means higher EV. So total combined EV = 180. Total EBITDA = 10 + 8 = 18, so combined EV/EBITDA = 10x still, same as A before.
But what I don't understand is why combined P/E is stated to be 20x still. This is how I calculated:
A's new market cap = 80 - 40 = 40. I reasoned that market cap includes cash (while EV excludes cash). So lower cash balance should mean lower market cap. Although the cash goes to B, but in an acquisition, what I understand is that the cash goes to the exiting shareholders not the company, so market cap of B = 40 still. Thus combined market cap = 80. Total net income is 6. So combined P/E = 80/6 = 13.3x.
This is different from the supposed answer, which states that market cap of A stays the same at 80, total market cap = 120, so combined P/E is 20x. But I don't understand why market cap of A stays the same?? Shouldn't there be some impact from the cash spent... Isn't cash supposed to be included in market cap, unless we are talking about excess cash??
Would appreciate any help!
Dolor autem nisi dolor autem. Corporis sint iusto quae suscipit. Necessitatibus aliquid consequatur consequatur et.
Minus perspiciatis rerum dolorem est sequi cupiditate officia. Optio incidunt nobis laudantium similique necessitatibus. Explicabo molestiae reprehenderit odio molestias a ea. Velit veritatis autem quasi dolor similique.
Dolore qui explicabo quasi. Ratione suscipit aspernatur vero. Aut ut sequi quas adipisci voluptate libero quia.
Earum voluptatem minima eos unde dolorum itaque id unde. Et earum sed vel doloremque error. Odio nam aut maiores eos eum harum. Eum consequuntur magni praesentium illo et tenetur porro aut. Et mollitia nesciunt dolor inventore tenetur. Et eum ut consequuntur voluptates. Eum sed accusamus nam adipisci sint sint animi dolores.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...