วันจันทร์ที่ 7 เมษายน พ.ศ. 2551

Enterprise Value - Determining the Takeover Value of a Company

Enterprise Value

Determining the Takeover Value of a Company


If you frequently read financial magazines, newspapers, and annual
reports, you have no doubt come across something called enterprise
value. You may have wondered what it is, how its calculated, and why
its so important.

What is Enterprise Value?

Enterprise value is a figure that, in theory, represents the entire
cost of a company if someone were to acquire it. Enterprise value is a
more accurate estimate of takeover cost than market capitalization
because it takes includes a number of important factors such as
preferred stock, debt, and cash reserves that are excluded from the
latter metric.

How is Enterprise Value Calculated?

Enterprise value is calculated by adding a corporations market
capitalization, preferred stock, and outstanding debt together and
then subtracting out the cash and cash equivalents found on the
balance sheet. (In other words, enterprise value is what it would cost
you to buy every single share of a companys common stock, preferred
stock, and outstanding debt. The reason the cash is subtracted is
simple: once you have acquired complete ownership of the company, the
cash becomes yours). Lets examine each of these components
individually, as well as the reasons they are included in the
calculation of enterprise value:

Market Capitalization: Frequently called market cap, market
capitalization is calculated by taking the number of outstanding
shares of common stock multiplied by the current price-per-share. If,
for example, Billy Bobs Tire Company had 1 million shares of stock
outstanding and the current stock price was $50 per share, the
companys market capitalization would be $50 million (1 million shares
x $50 per share = $50 million market cap).


Preferred Stock: Although it is technically equity, preferred stock
can actually act as either equity or debt, depending upon the nature
of the individual issue. A preferred issue that must be redeemed at a
certain date at a certain price is, for all intents and purposes,
debt. In other cases, preferred stock may have the right to receive a
fixed dividend plus share in a portion of the profits (this type is
known as participating). Regardless, the existence represents a claim
on the business that must be factored into enterprise value.


Debt: Once youve acquired a business, youve also acquired its debt. If
you purchased all of the outstanding shares of a chain of ice cream
stores for $10 million (the market capitalization), yet the business
had $5 million in debt, you would actually have expended $15 million;
$10 million may have come out of your pocket today, but you are now
responsible for repaying the $5 million debt out of the cash flow of
the business cash flow that otherwise could have gone to other things.


Cash and Cash Equivalents: Once youve purchased a business, you own
the cash that is sitting in the bank. After acquiring complete
ownership, you can simply take this cash and put it in your pocket,
replacing some of the money you expended to buy the business. In
effect, it serves to reduce your acquisition price; for that reason,
it is subtracted from the other components when calculating enterprise
value.


Why Is Enterprise Value Important?

Some investors, particularly those that follow a value philosophy,
will look for companies that are generating a lot of cash flow in
relation to enterprise value. Businesses that tend to fall into this
category are more likely to require little additional reinvestment;
instead, the owners can take the profit out of the business and spend
it or put it into other investments.