Quick Technical Question 3
Hey guys, quick question. Does anyone mind explaining the concept of Excess Cash to me? I understand in merger models and leveraged buyouts it's effectively the combined cash balances of the firm(s) - the cash used in the deal - minimum cash balance. But does the company acquiring this cash actually "pay" something to get it? In my mind, because EV to Equity Value involves subtracting debt and adding cash, I would assume firms with large cash balances naturally have a higher Equity Value, showing that you must pay "more" to acquire them since they have more cash (in a sense). But when evaluating merger models and leveraged buyouts, are we to see what the standalone company is paying versus the combined company (with excess cash included)? I'm confused on whether you check one or both of those metrics in order to make conclusions about the model. Apologies if this entire post was worded horribly, any answers would be appreciated!
Yes you pay for cash if you get it.
Think of a company that owns a box with a $100 bill in it: EV = 0 because cash flow = 0. However you are willing to pay $100 for the cash in the company.
Rest of your questions is not very specific. In general: in LBO equity value of seller will go up with cash. In merger models the % of shares after transction for each group of shareholders will depent on net debt (i.e. cash) of both companies.
Willing to look at more specific questions/examples if you need more guidance on the topic.
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