Why Would Someone Look at EV over EqV?
Is it correct to say that someone might look at EV because they want to acquire the operating assets of the entire company and see its value to all investors(like debt and preferred stock etc.)? Why would someone look at EqV over EV? Could a possible answer be that they plan to invest in the company but not buy the whole company or take a controlling interest?
I understand the concepts of EqV and EV, but I'm confused about when someone would want to look at one metric over another. Plus, it gets confusing with purchase price when people say EV is what you pay during an M & A deal, when in reality it's not. You usually pay the equity value plus some premium for synergies plus transaction fees right? Usually the acquirer refinances the debt or assumes it right? This doesn't affect the price to acquire the company, but I guess you could argue it affects the net transaction value.
Thanks for the help!
In M&A you still look at EV. Sure odds are the debt will get re-fi but think of it as if you’re buying a house.
Say you buy a $1mm house with $800k debt would you consider the price of the house to be only $200k (equity value)? No because that debt requires you to pay interest payments/monthly payments therefore in that sense EV is still very important
Thanks for your response. I agree I definitely think EV is still important. It gives an idea of the net value of the transaction to have full control over the operating assets of a company and factors in capital structure. My question is more so when would someone care more about EqV over EV and vice-versa? Would a potential acquirer care more about EV and an investor be more interested in EqV? What are reasons someone would care about one market valuation over another?
If I am a vendor I will care about EqV as that is the money I well get at the end of the day. If I am a buyer I will care about EV as I will need to take into account the whole EV in how I finance the acquisition and not only the proceeds of the vendor.
If I buy a company with an EV of 100m,a net debt position of 30m and an EqV of 70m. I will need to finance the 70m of Vendor proceeds but I will also need to either assume or repay the existing debt. In other words I will need to make sure I am able to finance the whole EV.
The vendor in this case (assuming a 100% sale) doesn’t care much how I handle the existing debt, what he cares about is the amount of proceeds he will receive for his equity, the 70m of EqV.
I hope this answers your question.
Thanks for this response! Makes it so much more clear now.
bump
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