Interview Question about two companies merging
Hello there!
Some days ago I was asked this question in an interview and I would like to figure it out.
Company A is buying company B.
Company A: EV 200; Equity 150; Net Debt: 50
Company B: EV 60; Equity 20; Net Debt 40
Solve the exercise in two ways: first all cash transaction; second, all equity.
What happens to company A' EV, Equity and Net Debt after the deal? (so two solutions, one for the all cash transaction and one for the all equity)
Could you help me out with this? I know it might be simple but I would really appreciate an answer that makes me understand this question.
Thanks a lot!
All Cash:
Company A: EV is $240, Equity is $150, Debt is $90
In a M&A scenario, you don't transfer the target Equity value, so assuming no change in stock price, the equity value stays the same, while debt rises (Acquired)
**Edit what I wrote above is wrong, the combined EV should be $260 and nor $240. Net Debt would be $110, Equity $150, and EV $260.
In an all cash transaction shouldn’t the net debt rise by 60 because you’re adding B’s current net debt and then raising 20 more debt to buy out the shareholders?
Yes.
Combined EV = Current EV ($200) + Target's EV ($60) = $260
All cash:
Company A essentially raises $20 then refinances the $40, bringing its own net debt to $110, add 150 equity goes to 270 EV
All equity:
Company A gives $20 worth of stock and assumes the debt, bringing net debt to $90 and equity to 170, combined gives 270 EV
All good except EV should be 260
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