How an Acquisition Impacts Enterprise Value

One of the calculations you will need to know for your series 79 exam is how an acquisition impacts the enterprise value of the acquiring company.

Let’s take a look at how an acquisition can impact the enterprise value of the acquiring company. The way the deal is paid for—whether in cash, debt, equity, or a combination—determines how enterprise value changes.

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Paying for an Acquisition in Cash

If the acquirer was to pay for an acquisition entirely in cash, the only direct impact to enterprise value might be the change in the company’s stock price in the marketplace.
However, it’s very difficult for companies to make large acquisitions using only cash on hand. Many corporations simply don’t have that kind of money readily available on their balance sheet.

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Funding an Acquisition with Debt or Equity

Companies that don’t have the cash available may need to issue securities to use as currency or to fund the acquisition.

• Issuing equity: Selling shares increases the company’s market capitalization, which increases enterprise value.
• Issuing debt: Taking on new borrowings increases net debt, which also increases enterprise value.
• Debt and equity combination: Many acquisitions are funded with a mix of both.

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Taking on the Target’s Debt and Cash

When a corporation acquires another company, it also takes on that company’s debt—which increases enterprise value—and gains control of the target’s cash balances—which reduces enterprise value.

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Example: SIA Acquires TRY

Here’s an example showing the impact of an acquisition on enterprise value:

• Acquisition price: $100 million
• Payment mix: 60% stock / 40% bonds
• Stock issued: 12 million shares at $50 = $60 million
• Bonds issued: $40 million
• Target’s balance sheet: $15 million in debt, $5 million in cash

Step-by-Step Impact

1. Issue $60M in stock + $40M in bonds = $100M purchase price.
2. Add target’s $15M debt → $115M.
3. Subtract target’s $5M cash → $110M.

Net increase to enterprise value: $110 million.

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Key Takeaways

• Paying in cash has minimal direct effect on EV but can influence market price.
• Issuing equity increases market cap and EV.
• Issuing debt increases net debt and EV.
• Target’s debt increases EV; target’s cash reduces EV.
• Most acquisitions use a combination of debt and equity.

Be sure you are ready to ace your exam. Review our series 79 study materials