50% cash 50% stock deal equity value impact
I’ve got a question on combined equity value in an m&a deal. I saw this question on BIWS and wasn’t sure if the answer was right.
Question : An Acquirer with an Equity Value of $500 million and an Enterprise Value of $600 million buys another company for a Purchase Equity Value of $100 million and a Purchase Enterprise Value of $150 million. What are the Combined Equity Value and Enterprise Value in 50% Cash / 50% Stock deal instead?
The answer says the Combined Enterprise Value stays the same regardless of the deal financing, so it’s still $750 million, which i get it. But it says the Combined Equity Value is $500 + $50 = $550 million. But shouldn’t it be $500 million since you use $50 million in cash which will decrease the acquirer’s equity value by $50 million which is offset by the $50 million in shares issued?
In a sources and uses setting think of it like this:
Acquirer Equity = $500M
Let's assume 100M shares outstanding
Acquiror Share Price: $5
Equity Consideration in transaction: $50
New shares issued: 10M
PF Shares: 110M x $5 = $550M PF Equity
The cash consideration whether from the standalone balance sheet or raising new debt doesn't impact standalone TEV because it is being used to acquire essentially $50M in additional assets
A correct S&U in a deal would end up being:
Purchase Equity of Target: $100M
Assume Target Net Debt: $50M
Total Uses: $150M
Total Sources: $150M
Stock Consideration: $50M
Cash Consideration: $50M
Assumed Net Debt: $50M
PF Net Debt: $50 (assumed net debt) + $100 (standalone net debt) + $50M Cash Consideration (use of cash means net debt increase or you raise $50M in new debt) = $200
PF Equity: $550
PF TEV: $550 + $200 =$750
Whether you assume the debt or refinance, it doesn't really matter. If you refinance, instead of assumed net debt - it would be new debt raised (this would be net of target's cash on hand so raising new debt = target net debt)
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