Question on a M&A/Merger Math Interview Question
So here is the question:
Let's say this same Acquirer (Equity Value of $500 million and Enterprise Value of $600 million) has Net Income of $50 million and EBITDA of $100 million.
The Target (Purchase Equity Value of $100 million and Purchase Enterprise Value of $150 million) has Net Income of $10 million and EBITDA of $15 million.
What are the Combined P / E and EV / EBITDA multiples in a 100% Stock deal? Assume the same tax rates for the Acquirer and Target.
My thought: Because we don't have shares outstanding data here, so I am gonna use the formula P/E ratio= market cap/net income to calculate the combined P/E. While I was calculating the combined market cap/equity value, I was debating between Purchase Equity Value and Purchase Enterprise Value. I understand Purchase Enterprise Value includes other stuff other than equity (eg. net debt), but I thought the buyer would buy the whole company, which means the buyer needs to pay for the whole enterprise value. So, for buyer, it needs to pay Purchase Enterprise Value of $150 million (100% stock as the question suggests). In this way, the new combined equity value/market cap would be $500m+$150m=$650m.
However, I checked the answer and the answer only uses the $100m Purchase Equity Value. Can anyone please explain why? Kinda confused here...
THANK you so much!
Hello - market capitalization specifically means equity value. They are equivalent, synonymous terms. When calculating Price / Earnings by Market Cap / Net Income, you will always use exactly that - Market Cap (= Equity Value) and Net Income.
If the point of confusion is the term “Price” in Price / Earnings (P/E ratio), it is essential to remember that this “Price” refers to share price, not purchase price. Share price is tied only to equity value (by shares outstanding), not enterprise value (per your point of net debt), to the extent that is a helpful connection.
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