Debt Free Cash Free M&A
If most M&A is on a debt free and cash free basis, why in a merger model do we add together the buyer and seller cash balances? Wouldn't the cash free part mean that the seller takes the cash?
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I think you mean funding side? In a share exchange (i.e., stock for stock deal), the buyer still buys all the assets of the target including cash and assumes all liabilities including debt. They just do it by paying in shares.
Thanks or the reply. What does the cash free debt free mean then (if the buyer gets both the cash and the debt)?
Means they’re funding the deal w shares.
Can also be a strategic move: if you keep more cash in the entity, you will get a bigger stake in the combination. Cash can also be payed out before deal if that's preferred.
Wouldn't we be paying the enterprise value though? So if we paid cash out in dividends or kept it, EV would not change so the stake the seller gets wouldn't change? I know I'm missing something, but not sure what it is
if you merge and pay with shares, you calculate relative ownership between the two merging parties based on equity value.
Lets take 2 identical companies with an EV of 100million and 0 debt. However company A has 100m of cash and Company B 0. Would you base the split in ownership between shareholders A and B of the combined entity on EV or EqV? EV A: 100, EqV A: 200 EV B: 100 EqV B: 100
Equity of A is worth double of B so owner A's stake in the combined entity should be double that of B ( so 66.6% vs 33.3%)
Typically in purchase agreements you'll see a couple schedule for working cap and net debt - essentially the net debt is in reference to your question, where you take the debt and debt like items and subtract the cash and the left over debt comes off the purchase price- hence the deal is done on a debt free, cash free basis.
If you assume the cash in an M&A you also need to assume the debt as well i.e. you take off the cash from the purchase price and add the debt (which as you can probably see if how you get to enterprise value).
Ah okay, so if we assume a cash-free, debt-free basis, then we would not be adding together our cash balances?
You don't merge on a cash and debt free basis. "Seller"has no proceeds except shares in the combination so there is no money to repay debt-holders.
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