Equity vs. Enterpise Value
I know the difference between equity value and Enterprise Value. What I do not understand is in M&A why is the purchase price the enterprise value and not the equity value?
Thanks
you assume liabilities
You use enterprise value because it tells you (ideally) the true cost of a company when you buy it. to use an analogy from M&I, say you are buying a used car. the equity value would just be its list price. however, say you open the glove compartment and find a bunch of cash. that cash being there makes the enterprise value lower, and thus makes the car look more attractive to you. on the other hand, if you find the the previous owner missed all of his payments on it, and you're stuck with a shit-ton of debt, that makes the cost a lot higher.
thus, in short, enterprise value gives you a better look at the overall cost of acquiring the company.
Most deals are structured so that outstanding debt is paid in the event of an M&A transaction. If outstanding debt of the target is not refinanced/paid off, then the outstanding debt is obviously assumed by the acquirer. Assuming a company is acquired, what do you think will happen to the debt? It is held as a liability on the acquirer's balance sheet.
think of it like a house purchase.. the price consists of the mortgage plus the downpayment/equity you put on it. so when someone else wants to buy the house, you buy it at the full value of mortgage and equity
The purchase price is later adjusted at Closing date by the Net Debt (and others) to comply with the (supposed) Equity Value at this date. An offer is made with the Enterprise Value in order to make clear of how much you value the business itself.
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