| Topic Name: |
Lots of misinformation |
| Message Name: |
Debt in transaction value |
| Date Posted: |
04/28/2000 |
| In Reply To: |
On the acquisition of the company, when the new owner becomes the sole debtor, how are the various types of debt treated for enterprise value. For example would an ABS or MBS issue still be considered as "debt" which would add to the value of the transaction. What about convertibles where the conversion will occur immediately after the acqisition? |
| Message: |
All debt instruments which are not converted in common stock equivalents are added to get to enterprise value, including asset-backs and other instruments.
Many debt instruments contain covenants that dictatce that upon a change of control transaction, the company will be required to immediately pay back the principal and any outstanding interest. This is to protect debt-holders from an adverse change in creditworthiness that results from a merger.
Even in this case, enterprise value remains mostly a theorectical number, because the acquiror will rarely pay off the debt as a result of a transaction. More likely, the acquiror will simply re-finance the outstanding debt, resulting in the same debt balance as pre-transaction. Enterprise value remains valid because the acquiror still owes the money eventually, even though he does not have to pony up the cash immediately.
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