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Hi Sir,
I’ve been having a small doubt while calculating the Equity Value of the Acquirer while in a Cash for Share offer.
The Value of equity is calculated by –
(Equity value of combined Co – Cash paid to target Co) / No of shares of the Acquirer’s Co.Here, why exactly do we subtract the cash paid from the equity value?
Q2)
While calculating the gain, what I actually do while presenting the answer is – I calculate the total market value of both the companies before and after the acquisition, and then find the gain in Market Values. which, eventually is the gain per share price.
Is this approach correct?(Image for reference)
https://pasteboard.co/31YBXGJYAKay.pngJust suppose that a company with a MV of 500 takes over another company with a MV of 200. You could only say that the new MV of the company is 700 if they didn’t have to pay anything for the other company. If they had to pay out 100 to acquire the other company then the new MV would be 500 – 100 + 200 = 600.
Good Morning Sir,
But, should a cash expense (here, the cash paid to the co. of MV 200) be deducted from the Market Value of Equity of another company?
Also, if you could please take a look at the second question as well, Sir? I posted it just below the first question in this thread.
It doesn’t affect the other company at all – they are being paid cash for their equity.
What you write in your second questions sounds correct (but I cannot comment on the figures because you have not told me where to find the question).
There might’ve been miscommunication from my side.
I was asking about the company that has paid the cash, why is the cash outflow subtracted from its equity value?
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