Purchase Price: Let's get it right, is it the Equity Value or Enterprise Value?
Hey Guys, during my internship in the BIG 4 Transaction Services Area, I actually learned, that what we really pay for a company is its equity value. The whole amount you really then have to pay is the enterprise value. What does that mean exactly?
It seems like there is not a unique opinion on this and that it can be seen from several perspectives.
Think about it this way. When Company A buys Company B, it does so by tendering an offer to Company's B shareholders. To acquire company B, it will pay a certain share price (typically at a premium) x outstanding shares, so that it owns 100% of company B's shares. Thus what Company A pays to legally purchase Company B is the equity value. However enterprise value is often used for transaction value because in most cases, the acquiring company will assume the target company's debt. So while Company A is technically paying the equity value to acquire B, the enterprise value reflects the actual cost better because its the equity value plus the assumed debt, net of cash.
unless a change of control clause is invoked, in which case you have to pay off the debt (this is usually done during LBOs and then the financial sponsor will then take out debt again for the company, but this debt will reflect the change in risk and usually a greater leverage amount too)
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