What is paid for an aquisition - EV or Equity Value?

nvm, delete xd

For simplicity we'll ignore fees. If the acquiring company is leaving the same amount of debt on the balance sheet, the existing equity value is roughly equivalent to the equity purchase price.

Example 1: Sources: $100MM cash (new equity), $100MM new debt Uses: purchase $100MM stock (existing equity), retire $100MM existing debt

However, the acquiring company could theoretically reduce or increase debt as part of the acquisition. If it wants to add leverage it will pay less than the existing equity value. If it wants to reduce leverage it will pay more.

Example 2: Sources: $50MM cash (new equity), $150MM new debt Uses: purchase $100MM stock (existing equity), retire $100MM existing debt

Example 3: Sources: $200MM cash (new equity) Uses: purchase $100MM stock (existing equity), retire $100MM existing debt

In example 2, you want to specify what you mean by purchase price. The EV was $200MM, but the amount of equity used to buy the company was only $50MM.

You pay the enterprise value of the business - the value of the operating assets. The fact that people exclude the portion of consideration comprised of assumed debt is incredibly strange to me. You don't get a discount on the value of operating assets based on the target’s capital structure.

Why would you treat assumed debt as something you do not pay?

No-one is saying the business is worth less with more debt on it. As an equity investor, you're paying for a lower equity value the more debt there is. The total consideration of the business doesn't change, the amount of cash you're paying as an equity investor varies depending on how much debt the company has.

Okay sure - I was just assuming it rolled over for simplicity and that there wasn't a change in capital structure. There are of course change of control provisions in debt and a PE investor would lever up much more and so on, but I was trying to address the original question which was why is equity value discussed in the context of an acquisition.

Thanks for the active discussion. So far I've understood that equity value and enterprise value are mere valuation concepts and that the price paid can deviate significantly. Equity value provides somewhat the lower boundary of a purchase price range with the enterprise value representingthe ceiling. However, I'm still a bit confused. Maybe someone can help to sum it up briefly.

Starting with the a market-value balance sheet composed of:

• Asset-Side: Cash (10) and Operating Assets (50)

• Liabilities & Equity-Side: Debt (20) and Equity (40)

If we buy for equity value, we pay 40. Buying for enterprise value would require a payment of 50.

My unresolved issues are

Acquiring all of the companies shares would cost 40. How does that actually make sense, as, if I acquire all of a companies shares, I at the same time assume all of its debt (which should amount to 40 + 20 = 60, or in other terms the firm value). With that said, paying the equity value should actually be more expensive than the enterprise value.

Obviously this line of thought has to be flawed, so I would greatly appreciate someone chiming in.

If you were a buyer, you would pay the EV for an asset. If FMV is A= $100, Debt = $20, and Equity = $80, you would need to pay $100 to acquire the asset. The "equity purchase price" that Rosenbaum refers to would be the $80, because this is how much you would have to pay to take out the existing equity holders so that you own the equity post-acquisition. But, as a buyer, you would need to fork over $100 -- not just $80 --because there is $20 in debt that you would need to assume, refi, or retire. Had you only paid $60, then $40 would go towards the debt and only $20 would be left for the equity holders. This is why you need to pay $100. In the end, the company's existing financing mix should not affect how much you pay for the business. If the business is worth $100, it is worth $100 regardless if it is all equity-financed or partially debt-financed.

To your question about GW, if I understand correctly (it's kind of hard for me to decipher your confusion), I believe you wanted to look at the GW calculation as the excess of the purchase price over the FMV of the operating assets. You can do that. If a buyer decides to pay $120 for the business, instead of $100, the GW would be $20 (=$120 - $100). This pencils out to be the same as the "normal" formula of taking the equity purchase price less the FMV of the net identifiable assets (=$100 - 80). It's all the same. In the former, you are looking at the FMV of the operating assets irrespective of financing so the purchase price that you use has to be for the entire business. In the latter, you are taking financing into consideration when you are looking at the FMV of net identifiable assets (i.e., equity) so the purchase price that you use had to be for the equity. You just need to be apples-to-apples.