Why does combined EV increase?
Lets say company A has EV of 100, Market Cap 80, Debt 20 and company B has EV of 50, Market Cap 30, Debt 20
When company A acquires company b, the combined EV is 180 (100+50+30) according to my notes
I guess my question is, why does the acquisition result in a higher combined EV than simply adding the 2 together?
Shouldn't the resulting EV by simply 100+50=150?
If that actually happened - companies would do nothing but merge. Perhaps you're taking into account 30 in synergies? Your combined EV should not be 180 in this situation.
I think you missed the part of the textbook about "synergy." Also, if you acquire firm B at a premium, that would add to its Mkt. Cap, consequently, adding to its EV.
I'm not sure the "premium" argument would necessarily work - as any premium paid would reduce firm A's EV as a cash outflow. If you do a share purchase, your EVs aren't affected - just split among a larger share base.
What if you used debt for the acquisition?
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