Tricky M&A question
If Company A has an EV of $500mm and Company B has an EV of $100mm and Company A purchases Company B for $200mm by raising $200mm in equity, what is the final enterprise value of Company A?
Answer says $700 because of a's original ev of 500 and 200m of equity from a, but i am pretty sure this is wrong.
if you raise 200 of equity, cash is up 200 and equity is up 200. if you buy b for 200, then cash is down 200, assets up 100 from b, and b's equity of 100 is wiped out. so net, cash hasn't changed, assets are up 100 and equity is up 100. it seems like really its only 100 of ev added to b from this transaction to give 500+100.
I may be very wrong, so happy to hear any more elegant simpler answers.
e: good to see 600 is consensus so far, i may be stupid and think this is tricky but it stumped me when i first saw
you're mixing some things up here, the EV of the combined entity will be EV (A) + EV (B), we don't care about the equity value as EV will be capital structure neutral
We don't know what is the breakdown of company B's EV to evaluate the equity value or debt, if you are looking into the BS, then you'd wipe out the equity line of B, add the debt from B, adjust the asset side and then plug in goodwill to balance.
Ok but what is ev(b)? $100 or $200?
EV(B) is 100, just because it's purchased for more than EV doesn't mean the EV changes
Would say 600. Add 100 in operating assets (EV) + 100 in goodwill (doesn't affect EV calculation)
I believe goodwill is an operating asset. I've never heard of backing out goodwill from enterprise value.
Based on the most helpful WSO content, your reasoning aligns with the correct understanding of Enterprise Value (EV). Here's the breakdown:
Initial Setup:
Transaction Mechanics:
Post-Transaction EV:
Final EV = $500mm (A's original EV) + $100mm (B's EV) = $600mm.
Key Insight:
So, the correct final EV of Company A is $600mm, not $700mm.
Good answer my man
If “EV” in your prompt is enterprise value, and we’re assuming efficient markets, the answer is $700 at a minimum, but probably more. Acq is worth $500, target is worth $100, pv of the synergies is worth at least the $100 premium (but probably 2-3x that, or believed by the acquirer to be).
Assuming EV means "enterprise value," then the EV of Company A ($500) + EV of Company B ($100) means the EV of the combined companies is $600 (w/o taking into account ambiguous things like synergies, etc...). How the transaction is financed (debt vs equity) does not matter (that would only affect the ultimate capital structure). Theoretically, the price you pay for it doesn't matter either.
I think the questions is a little misleading or confusing b/c it's saying Company B has an enterprise value of $100 and you pay $200 for it. Well why tf would you pay $200 for a company with a $100 enterprise value? If the answer says $700, then they're effectively assuming that the enterprise value of Company B is $200 based on the purchase price. Again, all of this is assuming we're not getting into synergies, etc.
Agree, this is a confusing question because it mixes intrinsic enterprise value vs. the calculated enterprise value from a deal.
Let's simplify it and break it down: Let's say I have created a magic box (i.e., a business) worth $500. That's the enterprise value (the intrinsic value of the magic box) of Company A in your question.
In addition to the magic box, I have a regular box to hold my cash, The combined value of the magic box ($500) and regular box is my "equity value".
--
I now find another magic box owned by someone else that is worth $100. That person doesn't want to give up their magic box unless I pay a premium of $100. And why would I do that?
Well, if I think combining the magic boxes will generate $100 or more of synergy value.
--
So now I find a friend and say, "Hey, lend me $200 so I can buy this other magic box and in return, we'll jointly own the combined magic box!" So the friend puts $200 of cash into my regular box, which then gets transferred right out to the seller.
My own magic box value doesn't change until I receive that magic box, and my regular box hasn't changed either because the $200 from my friend came in-and-out the box.
--
Once I receive the magic box and combine it with my own, I now have a big ol' magic box worth: $500 from my magic box + $100 from the acquired magic box + $100 from synergy value created = $700.
But what if no synergies were created? I still paid $200 to the seller, but regardless, the combined magic box is unfortunately only $600.
Therefore, the premium paid is irrelevant in this question other than to act as a proxy for my estimate of the synergy value.
If I believe in the $100, then it's $700. If not, then it's $600. But EITHER WAY, I paid out $200 that my friend gave me.
The $700 is therefore the correct answer assuming I'm not stupid and overpaying (aka "efficient markets").
700 is correct. EV=Equity+Debt-Cash. Only change is equity increasing by $200, so EV becomes $700. Assuming the fair market value of B is only $100, you'll have 100 of Goodwill created to balance the balance sheet but that's beyond the scope of the question.
This is not entirely correct. The formula is correct, but the MARKET value of equity did not increase by $200. It increased by $100. The equity holders of A own a $500 asset. New shareholders came in and provided $200 to purchase another asset valued at $100. The combined equity holders now own an sset valued at $600.
Always remember, enterprise value should always be thought of as the present value (i.e. discounted at the WACC) of FCF expected to be generated by an entity in perpetuity. Subtract net debt, and you have the market value of equity (market cap). Therefore, the present value of the expected FCF of Company A is $500. The present value of the expected FCF of Company B is $100. If A acquires B, then the present value of the expected FCF of (A+B) is $600. If Company A paid $200 for an entity whose present value of expected FCF is only $100, then they're idiots and they likely destroyed shareholder value through dilution from the equity raise. The transaction likely did create goodwill on the balance sheet, but that has nothing to do with enterprise value.
Goodwill is nothing more than an accounting figure on the balance sheet that is created when the purchase price of an acquisition is higher than the accounting/book value of the Company (mostly always the case). Goodwill has nothing to do with enterprise value.
I would guess this is a basic question intended to check whether you know the EV formula. Assuming a PERFECT market, and you know that you overpaid EXACTLY by 100, then your equity value would only go up by 100 (up by 200 then down by 100 because the market knows you overpaid for the assets). But:
BIWS says that Goodwill is an operating asset, hence affecting EV. Also, this answer ignores synergies
Jeez. The value of anything is whatever someone is willing to pay for it. If Company A is willing to pay $200 for Company B, then it’s worth $200.
If I was asking this as an interview question, I’d be asking this to set up the interviewee to think about why is it that Company A would be willing to pay $200 when the public markets only ascribe a $100 value — not to go down a path of how to calculate EV.
And there’s lots of reasons why Company A might value Company B more than the public markets. Cost synergies is an easy one. Perhaps Company B has a promising long term potential but needs to undergo a period of heavy cash investment — private ownership with a long term perspective will value that more than the public markets.
The only case where Company B is still worth $100 is either (a) Company A is somehow affiliated with Company B and this is not an arms length transaction or (b) Company A is stupid and overpaid.
Agree with what you said but my point is that everything you mentioned would come up in a follow up question, I'm confident this is a very basic question about EV maths.
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