EV is sometimes referred to as the minimum you would have to pay to takeover a company. but doesnt an acquirer usually pay for the equity + premium and assume the debt, not actually paying for the debt?
so this could end up being less than the EV correct?
any info is appreciated.
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EV is the value of the entire business / company, but to control the business and its cashflow you have to buy out the equity portion only, so you say EV - Net Debt = Equity Value. Bear in mind that some deals are done without acquirer assuming the existing debt, then Enterprise Value = Equity Value.
EV is the value of the entire business / company, but to control the business and its cashflow you have to buy out the equity portion only, so you say EV - Net Debt = Equity Value. Bear in mind that some deals are done without acquirer assuming the existing debt, then Enterprise Value = Equity Value.
That is wrong. If you look at the sources and uses from an acquisition the company will more than likely be required to pay off its existing debt due to a change of control provision. Assuming for simplicity that EV-Net Debt = Equity Value. It does not matter if you pay $100 million for the equity and assume $50 million in debt or if you pay $150 million in TEV for the company. You end up with the same ratio of debt and equity in both purchase prices.
the minimum value for any firm is $0...gee, i thought you learned that from your dream companies - BSC & LEH.
"What's the firm minimum? That's a buying question. Right there that guy's gotta take me down. So I asked him, what's your 800 number? That's a fuck-off question. I was giving him a run, and he blew it. Okay? to a question like what is the firm minimum. The answer is ZERO." -Jim Young, 'Boiler Room'-
London, shut up!
so essentially even if you only pay for the equity the debt is still considered a "cost" of acquiring the firm, which totals the EV?
Don't forget about cost and revenue synergies on top of EV. Usually they increase the cost of takeover.
No revenue and cost synergies do not add value on top of the Enterprise Value. If you are an acquiring company and believe that you can achieve savings by acquiring a company, you would try and pay the lowest price possible so that you limit the amount of the savings you pay for.
An example, if you are acquiring a company and believe that at $100 million dollars it is an attractive value. You think you can realize $25 million in savings and therefore the acquisition would be worth $125 million to you. If you paid $125 million for the company and did realize all the saving you would be no better off than if you did not do the acquisition. If you paid $110 million and realized the full $25 million in saving the deal would be beneficial. When someone puts a value on a company it is usually believe to reflect what they believe are reasonable and achievable savings and synergies. It does not increase the EV, because they will already be baked in.
No, synergies don't have to do anything with EV. Remember deal between WFC and Wachovia? It didn't matter wether WFC, Citi, GS, or NY Times estimated EV for Wachovia because EV was the same. But synergies were different. WFC is strong on West Coast, they needed Wachovia to become stronger on the East Coast. Citi needed Wachovia for it's cash, hence goals were different, and so as synergies.
A simpler example. You give a kid from high school a TI-89 calculator (EV around $160 ) and he will find synergies worth maybe $20 (faster calculation, available games). Now bring same TI-89 to Math/Econ/Stats Department of Princeton, and undergrad students will value synergies at $60 (built-in programming language, integral calculations, complex derivative, 3D graphing). Same tool, completely different benefits.
Durrrrr Hurrrr, obviously synergies don't add EV value, but they play important role during takeover
goalieman688, sorry but I didn't get your point... Because even if you have to refinance the debt (change of control provision), when acquiring a company you are actually paying for the equity portion, since another tranche of debt will be raised to retire the old debt... in that sense, although we talk about EV, we only pay for the equity... that's what matters! Remember, EV is nothing more than a metric...
Not true at all. Think of the sources and uses when making the acquisition. If you have a company that has $50 million in debt and you purchase the company for $100 million dollars and you assume the debt, you paid $50 million for the equity and $50 million for the debt. If you refinance the same debt you will have to retire that $50 million of outstanding debt, which will leave $50 million for the equity holders. One of the only cases that EV will equal equity value is if a company has no outstanding debt.
I am trying to do a return on equity analysis - could I get some help from someone please? I am a new analyst at a small boutique.
The initial investment is $6,000,000.
The free cash flows are as follows:
2013 = 0 2014 = 0 2015 = 0 2016 = 600,000 2017 = 600,000 2018 = 600,000 2019 = 600,000 2020 = 600,000 2021 = 600,000 2022 = 600,000 2023 = 52,315,912 2024 = 64,588,052
The discount rate is 10%
The terminal value assigned to this project is 6x free cash flow.
The reason why the final two years of the projection period are so much higher is that in 2023, the debt is paid off and all free cash can flow down for equity.
Could someone give me some guidance asap in doing this calculation in excel? Thank you so much.
I think what you are confusing here is purchase price and enterprise value; in this discussion I have used these interchangeably. In your first example, Wells Fargo's bid and ultimate purchase price (EV) blew Citi's out of the water. Citi offered about $2.1 billion or about $1 dollar a share. Wells Fargo offered $14.8 billion or about $7 dollars a share. These would imply two different enterprise values. In the context of an acquisition, Enterprise Value of Wachovia would be different between Citi, GS, Wells Fargo and NY Times, because each company would not only place a value on the stand-alone company, but also a value of what that company is worth to them.
Your "simpler" example is fundamentally flawed, because there is already a fixed price on the calculator so that is the minimum someone is going to pay and I would argue that the math/econ/stats students would pay more for the calculator than the high school kid.
A better example would be if I had a piece of property and two people were interested in buying it. The first person thinks that the property is worth $100 and he would be able to get another $75 dollars of use (synergies) out of the property. So he might be willing to pay me $125 for it. The $125 would be your EV. The second person looks at the property and determines that the property is worth $75, but he can achieve $125 dollars of use (synergies) out of the property. He might be willing to pay me $150 dollars for the property. EV in the second case is $150. The EVs are not the same because the values to each person are different.
Oh well my bad, I was referring to general Enterprise Value from Yahoo/Google Finance, not the one you calculate with DCF/comps, my bad
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