Strange multiple and debt in acquisitions?
Question 1> Asked in an interview:
Would the following multiple be appropriate:
Enterprise Value / (EBITDA - Tax)
Both the numbers should still be apples-to-apples right? But would subtracting Tax have an impact on tax shield etc (thus apples-to-ornages)?
Question 2>
What normally happens to debt of the target company in acquisitions? Do companies normally buy other companies on a no debt no cash basis or would they assume the debt?
In both cases, what is the actual consideration to be paid to the target? The equity value or the enterprise value?
Thanks!
Question 1-- you can't subtract tax- tax shield.
Question 2-- Think of enterprise value- includes net debt (LTD + STD - C)
Hey, thanks for your reply! Could you please explain why tax-sield will make an impact a bit more please?
For number 2. The company would pay the equity value to shareholders, but the enterprise value is seen as the true cost of the deal because the company most likely would assume the debt.
I'm not sure about EBITDA....you can minus tax because (EBITDA-Tax) is the same as (EBITDA x 1-Tax Rate). The ratio is similar to EBIT which would use the Enterprise Value, but the fact that you still have Depreciation to pay and that you took out taxes means its not really a good indicator of the operation strength of the company....I would say as long as you talked about what you thought of it...not commonly used so client would not really look at it. The fact that EBITDA is available to all shareholders so you would use enterprise value, but your not sure about the tax, ect. They probably wanted to see if you could work your way through it/how you thought through things.
it's not appropriate because taking out your tax, which depends on your capital structure, makes it apples-to-bananas.
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