Acquiring a company midyear
I was hoping someone could help clarify a really simple question for me. If Company X (acquirer) is acquiring Company Y (target) at the end of June 2013, is it correct to say that the target's 1st half cash flow from operations unless 100% retained as cash cannot be used by the acquirer later on in the year? Here is a basic scenario:
Company Y is going to make $6 million in cash flow from operations split evenly over the two halves of the year. During the first half of the year the $3 million in CFO is spent. Thus, Company X only gets the benefit of the 2nd half cash flows. Does that all make sense?
Thanks for your help
This depends on what you mean by "spent" and by "can be used by X" vs. "X gets benefit":
Either way, the value of the firm is determined as the present value (PV) of its projected future cash flows.
1) If they distributed the $3m CFO to shareholders, projected cash flows starting July 1st would be identical to those projected back in Jan 1, with the value of the firm on July 1 equal to that on Jan 1 (from the valuation date).
2) If they used the $3m CFO for CapEx (e.g. buy machinery), X acquires a company that has $3m more in fixed assets than in the beginning of the year. Thus, the PV of expected future cash flows as of July 1st should be $3m higher than the PV as of Jan 1st (assuming they bought machinery worth the money). Had they just left the cash laying around, it would be the same, just that instead of having higher future cash flows you'd have an extra $3m cash on top of the PV of expected future cash flows (which would still be identical to that back on Jan 1). Thus, the CFO from the first half year can be used by the acquirer not only if 100% is retained as cash, but as long as the money is retained anywhere in the firm (given it's applied to good use and if by "benefit to the acquirer" you mean "value the acquirer gets"). Then again, they'd have to pay a $3m higher purchase price than on Jan 1.
Monkey's advice is wrong. It depends on whether you use closing accounts (business is sold cash-and-debt free / you have to fund the cash on the BS at closing) or locked-box (purchaser gets to keep cash as of locked-box date). If you use locked-box you will have to pay interest on the purchase price which should mirror the cash generation of the business so in sum there is no difference between the two methods. To summarize, as a base assumption, no you don't get to keep the cash generated prior to closing.
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