Equity Value, Enterprise Value, and Multiples in M&A Deals

Question 1

An Acquirer with an Equity Value of $500 million and Enterprise Value of $600 million buys another company for a Purchase Equity Value of $100 million and Purchase Enterprise Value of $150 million.

What are the combined equity value and enterprise value?

Answer 1

The Combined Enterprise Value equals the Enterprise Value of the Buyer plus the purchase Enterprise Value of the seller, so it’s $600 million + $150 million = $750 million

You can’t determine Combined Equity value because it depends on the purchase method.

Question 2

How do the combined equity value and enterprise value relate to the purchase method?

Answer 2

The combined enterprise value is not affected by the purchase method.

The combined equity value is equal to the buyer’s equity value plus the value of stock issued in the deal.

Question 3

In a 100% cash or debt deal, the seller’s equity value just disappears, how is that possible?

Answer 3

The seller’s equity value doesn’t disappear, it is transformed into the cash or debt used by the acquirer in the deal.

The combined enterprise value calculation demonstrates this point

Question 4

How do the combined multiples change based on the purchase?

Answer 4

Enterprise Value based multiples do not change based on the % cash, debt, and stock used because the combined enterprise value is not affected by the purchase method, and EV-based metrics such as revenue, EBITDA, and EBIT are also not affected by it.

Equity value-based multiples will change based on the purchase method because the combined equity value depends on the % Stock used, and equity value-based metrics such as net income and free cash flow are impacted by foregone interest and interest on new debt.

Question 5

What are the possible ranges for the combined multiples after a deal takes place?

Answer 5

The combined multiples should always be between the buyer’s multiples and the seller’s purchase multiples.

You can’t average the multiples to determine the combined multiples because the companies could be different sizes.

You can’t use the weighted average because the proportion of Enterprise Value and EBITDA from each company will be different.