Value of Cash Conveying in an M&A Transaction
I’ve been asked the following question on several occasions:
If a publicly traded company is being acquired and it has cash in the bank, would the acquirer need to pay more to include the value of the cash?
It’s kind of a technical question, and the answer is somewhat unintuitive initially, but fairly straight forward once explained with a simple analogy.
The calculation for Enterprise Value (EV) – the actual value of the company – subtracts cash.
EV = (market cap) + (debt) + (minority interest) + (preferred shares) – (cash and cash equivalents)
If this seems backwards, keep reading.