Why substracting Investment in Associates from Entreprise Value and why at market value ?
Accounting for Associate Investments in EV
When completing a detailed EV calculation, you subtract out associate investments as they are considered like cash - something that would be liquidated to pay off debt or liquidated in the case of a sale. You would subtract the value of these investments at market value as if you were selling the investment right now to pay off debts. Our users explain below:
From what I was explained, investments in associates is almost like a market (stock) investment. Deducting it out of EV will be done to account for the likely sale of this investment once the firm is acquired, as it is not really part of the operational enterprise. There is scenarios where the investment is something the possible acquirer may want to keep, in which case you could add it back to EV (again at market value).
Think of it like cash... when subtracting it from EV, you're implicitly classifying these investments as being highly liquid. This in turn will be used to offset the purchase price when acquiring the company (as explained by the previous poster).
User @gomes3pc, a private equity associate, shared a different perspective:
Enterprise value is supposed to calculate the value of the core business operations. That's why you take out net cash - it is not part of the business. Investments in subs/associates are just like illiquid stock investments - they are not actively part of the company's core op's.
Check out the image below which offers a detailed breakdown of enterprise value.
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