M&A and Minority Interest
I know this topic has been brought up many times, but there is one question that I have not been able to find an answer to.
In a M&A transaction, does the buyer INHERIT or PURCHASE the minority interest of the target (assuming the target has minority interest on its balance sheet)?
Also, once the deal closes, does the minority interest get revalued at FMV on the buyer's pro forma balance sheet?
Thanks for the help.
Correct me if I'm wrong but minority interest is included in the enterprise value of the company, and purchase price consists of EV+Control Premium, so therefore it is probably considered "purchased".
Hmmm, I'm not sure if that's right.
For a public company the purchase price is equal to Market Cap + Control Premium (not Enterprise Value).
Also, the control premium is only paid out to the shareholders of the parent company (not to minority owners in the parent's subsidiaries).´
However, I am not sure if the minority interest has some "change of control" clause that requires the buyer to "buy out" the minority shareholders of all the parent company's subsidiaries.
Anyone?
The buyer assumes the target's noncontrolling interest at FMV.
It doesn't need to be bought out.
I disgree with you. Purchase price is not equal to market cap +control premium. That is highly inaccurate. What about the debt? EV= Market value of stock + preferred stock+minority interest -net debt. You still have to assume the debt in order to take control of the assets, since debt holders have claims to the assets.
Blatant, you're wrong. If the target is a public company, the purchase price IS equal to its market cap + control premium.
If the buyer "assumes" the debt, it does not have to pay for it.
Can anybody else shed some thoughts on this?
I may be wrong here, but I think the following should clear things up:
In order to actually purchase control of a company it will cost the acquirer the market cap + control premium (once the deal is announced, the new stock price of the target will reflect the control premium).
However, once the acquirer owns the entire stock of the other company, it is implicitly responsible to pay the debt, and it also gets the cash of the company. Therefore, bankers calculate the Enterprise Value because that is a more accurate reflection of the true cost of taking control of the company (adding debt and subtracting cash). But to actually buy the company, it will only cost the market cap + control premium.
As for minority interest, that is the portion of the subsidiary that the target does NOT own (but has to fully report earnings on books if it owns more than 50%). The reason minority interest is added to enterprise value, is so that it will be an apples to apples comparison when doing EV/EBITDA or EV/Revenue multiples (because of consolidated earnings). But when an acquirer takes over the target, it does not actually pay or inherit this "minority interest."
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