Measuring Implied Equity Value in an Acquisition

I think I disagree with Capital IQ's approach. This from their FAQ:

Implied equity value(Total Consideration to Shareholders ÷ Percent Sought)
+ Other Consideration
+ Total Earnouts
+ Total Rights/Warrants/Options
+ Adjustment Size
+ Net Assumed Liabilities
= Implied Enterprise Value

What I'm not clear on is why Options/Warrants are not included in Equity Value. I suppose you could make the same argument for earnouts. Aren't we trying to measure the value of the firm to all equity holders?

 
Best Response

Options/warrants are not included in equity value because these securities are not equity until excercised. Same with earnouts in theory - although in practice most earnouts are paid via cash distributions, so they would not be included as part of the equity value (when distributed, earnouts will show up as a Capex line item).

For this reason, people generally look at the value of equity both on an "as-is" basis and on a "fully diluted" basis (so as to account for dilution from options, warrants, earnouts and other securities).

 

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