Question regarding purchase price
So I am a bit confused on what the actual price paid for a full company is.
Example:
Company A: 50 million market cap, 20 million cash, 0 debt
Company B: 50 million market cap, 0 cash, 20 million debt
Would the actual amount paid (assuming all cash transaction) be 70 million for company A and 30 million for company B (making the effective purchase price of both the same)? Or would the actual amount paid be 50 million for both, making the effective purchase price of company A be 30 million and the effective purchase price of company B be 70 million?
Thanks so much!
The guy below is correct. I confused market cap with EV. I work in private deals and thought same same. If you’re using market cap then it’s a public company.
Not same same.
EV is your solution.
So in the second case, the sellers receive $50 million, pay off the debt, and then distribute the $30 million remaining to shareholders?
No, see my reply below. The sellers receive $50MM of the $70MM in financing raised by the buyer. The remaining $20MM goes to repaying (or refinancing/rolling) the existing debt.
This is incorrect. A company with a $50MM market cap (equity value) and $20MM in cash is a $30MM company (enterprise value) that happens to be sitting on $20MM cash. Once the sellers sweep the $20MM of cash out pre-sale, the market cap of the company falls to $30MM.
Enterprise value is: Equity Value (Market cap) + Debt - Cash.
Company A's Enterprise Value is: $50 + $0 -$20 = $30MM Company B's Enterprise Value is: $50 + $20 -$0 = $70MM
To buy Company A you need $30MM in financing. To buy Company B you need $70MM.
So in the $30 MM case, would you still give the sellers $50 MM like you would in the $70 MM debt case?
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