Saw a few companies which have negative EV....Say 1bn market cap and 1.3bn cash, 0 debt. What are the implications of this in an acquisition? are you basically buying it for free??? Also, is cash sitting on the BS factored in the market cap? My initial thought be yes---that's the reason we minus it from EV calculation in the first place, right?
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Implication is book value > market value so it's undervalued.
http://aswathdamodaran.blogspot.com/2008/12/entperise-value-is-negative…
What my boy Aswath has to say 'bout it.
You won't be buying it for free if you are going to acquire it because you'd be paying for much higher than the enterprise value. The market (correctly or incorrectly) values the present value of all unlevered free cash flows in the future to be lower than the current book value of the firm.
This basically means the market expects the company to deteriorate really badly in the future. The business might be going awry. Or, it means that there are complications with the company itself. Banks for example, almost always have negative enterprise value because they have so much cash that is not theirs.
If there are no such reasons - business not going awry, or other fundamental reasons for why EV should be negative, then it's a value buy.
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