Great job in elaborating the textbook formula of EV in a real example! One question though - we do not typically make pro rata adjustment to the EBITDA because there is not enough information disclosed. But then with that limited information, isn't it equally difficult to come up with the value of the associate company (i.e. 100 in your example)? Sorry if I missed this part from previous videos....
Yes, but most Associate Companies are very small, and if they are bigger/more significant, most companies disclose the fair market values... or if they're stakes in public companies, you can look them up yourself.
Was asked the associates question in an interview at Bank of America - I damn right scratched my head and confused it for noncontrolling interest, although the interviewer helped out. Glad to have found this video at least for the next round of applications I guess.
You mentioned that simply adding the % of the associate company's EBITDA to the parent company's EBITDA would solve the problem of the EV/EBITDA ratio, as the market value of equity in the parent company reflects the % held in the associate company, but this is impossible in real life as the parent company does not disclose such figures. However, if we suppose that this information is available and we follow the procedure you mentioned, I believe the multiple would still be inconsistent. You would need to add the % of the debt held in the associate company to the EV, as well as subtract the % of the excess cash held in the associate company (even if in reality we might not have this information available). Great video btw! :)
Yes, that is an issue as well. We mentioned this point not to make a comprehensive statement but rather to illustrate one problem with this approach and why no one really uses it in practice.
When you showed the first option (which has increased the EBITDA of our parent company) you added 30% of the associate's EBITDA, which automatically will result in a higher FCFF and a higher EV. But if you do the second option (which is what most analysts do) you SUBTRACT the value of the equity investment from the EV. My question is, why do we subtract rather than adding? The two approaches seem inconsistent to me. Am I missing something?
Equity Value, unadjusted, includes 30% of the other company's market value. And if you calculate Enterprise Value starting with Equity Value and do not add/subtract anything related to Equity Investments, Enterprise Value will still include 30% of the other company's market value. EBITDA, unadjusted, includes 0% of the other company's market value. This is inconsistent because you want them both to contain 30% or 0% (or some other percentage that is the same). So, you can either add 30% of the other company's EBITDA to bring that up to 30%, or you can subtract the "Equity Investments" (which represent 30% of the other company's market value) from Equity Value in the Enterprise Value calculation. The goal is for both to include 0% or 30% of the other company.
It's not available for this one (quite old content), but you can find similar files here: breakingintowallstreet.com/kb/equity-value-enterprise-value/ mergersandinquisitions.com/equity-method-of-accounting/
Andrea Cantoni It stands for the Associate Company's Equity Value (Market Cap), or if it is not publicly traded, it stands for the Associate Company's Equity Value as determined via a valuation of the private company.
How would this look in an LBO context? Do we also subtstract associates and add NCI if moving from EV to equity purchase price? (e.g. to set up the S&U). Lets say we have an EV of 200 (20x multiple * 10m EBITDA), 20m associates, 10m NCI,5m unfunded pensions, 3m capital leases, 30m existing debt, 5m short term investments and 8m cash on the balance sheet We raise 40m in debt. What would the S&U look lik Thank you a lot!
These items should not appear in the Sources & Uses schedule of an LBO in 99% of cases because target companies rarely, if ever, change their ownership of these items, and no cash changes hands to correspond to them.
Hi, thanks for the great video as always! In Yahoo!/Alibaba's case, if we subtract Yahoo's 26% stake in BABA from Yahoo's equity value, we end up with a negative number, which means that Yahoo now has negative multiples (EV/EBIT, EV/EBITDA, EV/Sales are all negative...). In this case, do people still calculate the multiples in this way? It seems that negative multiples don't make to much sense. Why don't people do this: 1. If A owns
No, you would not do that in this case. Since Alibaba is a public company, you could just add 26% * Alibaba's figures to Yahoo's own financial figures and calculate the multiples like that. But this only really works when the other company is a large public company like Alibaba with disclosed financial information - 99% of the time these Equity Investments correspond to private, closely-held / illiquid entities with no publicly available financial information, so it's not really viable to do this.
Hello Brian, One question: what if these equity investments are needed for/involved with the company's core business operations. I.e. They fit the enterprise value definition. Would you still subtract the equity investment then when moving from equity value to enterprise value?
Yes, because even if they're somehow related to the company's business, accounting rules mean that they are presented on the financial statements differently... so you would run into consistency issues when calculating multiples such as EV / EBITDA.
in case you are looking at the cash flow statement, can you use the cash flow from operations, given that net income is already after EBITDA/EBIT (looking at apples-to-apples comparison)? Thank you, Roberto Sfeir
+roberto sfeir I'm not sure I understand your question. What are you using Cash Flow from Operations for? If you're using it as part of a valuation multiple, it has to be paired with Equity Value since CFO includes the net interest expense. Or are you asking about how to adjust for Equity Investments within Cash Flow from Operations, or something else?
Hi, another great video. But I was wondering, how do you connect this reasoning of "Subtracting Equity Investments in order to compare aples-to-aples in Valuation Multiples" with the reasoning in other Videos, which is simply "It's a Non-Core-Business Item, and per definition of EV shouldn't be included in the EV". In other words, which of these arguments would you recommend giving in an Interview? Thanks!
Hello, great video. One question, when doing a full DCF analysis for the combined company, is the common practice to project the Equity Investments line item (and include any dividend payments I get from that investment in the projected FCFs) or to ignore it and subtract the current value of Equity Investments to the discounted cash flows, once I have them, to get to EV?
No. Just ignore this line item in a standard Unlevered DCF, ignore income/expenses from it, and then add its value at the end when you're creating the bridge between Implied Enterprise Value and Implied Equity Value.
Thank you for the tutorial! I have one question regarding the equity value when there's equity investments. According to the tutorial, the equity value of the combine company is equity value of the parent plus 30% of equity value of the associate. However, when we do the BS for the combine company after equity investment, (asset side) we add equity investment, add 2 for equity invesment earnings and subtract cash for this investment; (equity side) we add 2 for retained earning. So does it mean that the equity value of the combine company should increase 2 after equity investment? Thank you!
Sorry, I don't understand your question. Equity Investments contribute to the company's Equity Value *implicitly* - in other words, the share price should already reflect the value of those equity investments. You don't do anything special when combining companies in a merger model context... just add together the Equity Investments on the buyer and seller's Balance Sheets. The price the buyer pays for the seller's equity should reflect the seller's Equity Investments as well.
Hello, thank you for your videos. I have a question: when doing the bridge from equity value to EV, we add minority interest and subtract associate, do we take the book or the fair market value of those items ? If we use the fair market value, how are we supposed to value them ? Isn't it too time consuming to find the market value (with traditional valuation methods) of each associate and minority interest each time we try to find the EV for a company ? Thank you !
Ideally you will use the fair market values, but if there's not enough information to do so or these items are fairly small, you can just use the book values. It's rarely worth the time and effort to do this unless the Equity Investments or NCI correspond to publicly traded companies with easy-to-determine values or other high-profile companies that are easy to value, or they're very large. So in practice, most people just use the book values.
If we subtract the equity investments from enterprise value, that means we value the parent company as if it didn't own the investment right? And in case we would want to calculate an acquisition price for the parent company we would still have to factor in the value of the equity investment to get a fair price? Basically the only reason to do this adjustment is to get comparable metrics but not a fair value of the parent company? Thanks for the video!
Yes, the main point of this adjustment is to create comparable metrics. In reality, the acquirer would still have to pay something for the equity investments of the parent company because the parent company's equity value (and stock price for public companies) will reflect the value of those investments.
Another reason for deducting "equity in associates" is to arrive to EV that is the same EV we get from DCF model i.e. in DCF computation NOPAT number is the number of only parent company (not combined). Consequently, FCF does not include cash flow from associate company. The question is: HOW do we correct unlevered FCF (or NOPAT) in DCF model so that we get fair acquisition EV?
Could you please comment whether my understanding is correct and answer one question? As I understand the reason for deducting "equity in associates" is to arrive to EV that is the same EV we get from DCF model i.e. in DCF computation NOPAT number is the number of only parent company (not combined). Consequently, FCF does not include cash flow from associate company. But how do we correct unlevered FCF (or NOPAT) in DCF model so that we get fair acquisition EV?
Yes, that is one reason you deduct Associate Companies or Equity Investments to move from Equity Value to Enterprise Value and why you add them when doing the reverse. But the main reason is much simpler: They're non-core-business Assets, so they should not be included in Enterprise Value. You don't need to do anything special because if you calculate the purchase price based on a DCF, you get to Implied Enterprise Value at the end... and then you can back into Implied Equity Value, which represents the amount a buyer would have to pay for the seller's shares.
Thank you for the reply! However, if I understood correctly, the EV calculated based on a DCF will be misleading in this case? And is there anything we can do to DCF to get correct EV in the first place? I just wonder if EV by itself (for other than backing into Implied Equity Value purposes) is used in practice? And if it does, is it acceptable to use this a little understated EV from DCF model in practice?
How would Implied Enterprise Value calculated based on a DCF be "misleading?" It's supposed to represent the PV of future, recurring cash flows from the company's core-business Assets that are available to all investors. Equity Investments or Associate companies are not core-business Assets, so cash flows from them should not be included in this number. When another company wants to acquire this one, it has to pay at least this company's Equity Value, and that Equity Value *does* include the value of non-core Assets such as Equity Investments. You almost always calculate both Enterprise Value and Equity Value in valuation and modeling because they each have their uses and are useful in different contexts.
You stated that the associate companies' income statement will not be disclosed except for Net Income. I don't understand this, if for example, Facebook buys 30% of Amazon stock, wouldn't Amazon be the associate company and Facebook be the parent company in this scenario, and wouldn't Amazon just continue running like a normal company and disclose the entire income statement? Thanks!
Sure, if Facebook buys 30% of Amazon, you can easily find the financial figures. But most deals like this are for smaller private companies where the financials are not disclosed. Also, sometimes companies group together the results of many different equity investments, so you can't necessarily separate them and establish which results belong to which company.
I understand in both videos how you add non controlling interest to Enterprise calculating to reflect the 100% of the parent company's stake in the associate company as EBITDA reflects 100%, and same for subtracting equity investments to reflect EBITDA's 0% in the associate company. However is that just when you using valuation multiples such as EV/EBITDA to get an apples to apple comparison, however what if you were just calculating Enterprise value by itself and not using it for valuation multiples, would you not add noncontrolling or subtract equity investments because you want enterprise value to reflect the true value the parent company has in the associate company? THANKS! LOVE YOUR VIDS :)
You should do that even when calculating Enterprise Value on a standalone basis because Equity Investments are non-core-business Assets, and Noncontrolling Interests represent another investor group in the company (the minority owners of the company the parent owns a stake in).
Doesn’t this assume you know the value of the equity investment? Just like you often don’t have p&l for associate company, don’t you often not have the value (unless publicly traded)?
Companies always list at least the book value of the Equity Investment on their Balance Sheet or in their filings. If they do not, then it is because the Equity Investment is so small that it doesn't impact the company's valuation by much, in which case you shouldn't worry about it. It is better to use the market value if you can get it, but not all companies disclose that or even explain how you might be able to calculate it.
Hi, great video! just wondering, like you mentioned, if Yahoo's share price is so much effected by Alibaba, doesn't it make more sense to keep 40 % of Alibaba in yahoo's enterprise value calculation? If this is just due to not possible to get the info of associate company's detailed income statement, is there anything we can do if we want to count Alibaba in the calculation of yahoo's EV?
If Yahoo disclosed all of Alibaba's financials on its own statements, then yes, you could keep its stake in the Enterprise Value calculation. The problem is that it doesn't disclose Alibaba's contribution to Yahoo's revenue, operating income, etc. and so you could never accurately calculate metrics such as EBITDA, and therefore you could not calculate multiples like EV / EBITDA with that approach. So you pretty much have to subtract its stake in Alibaba to calculate an Enterprise Value figure that you can actually use in multiples such as EV / EBITDA.
Mergers & Inquisitions / Breaking Into Wall Street Hi, thanks for your reply. does this happen to real life often: an associate company affects the parent company's revenue, share price, etc. so much, but without any accurate info, you have to subtract it? Is it a problem in real life?
E Chang Yes, that problem sometimes happens in real life but you really cannot do much unless you have better numbers for the other company. In this case, we could now actually adjust for this because Alibaba is a public company and we can easily get its numbers. So it would be possible to simply add Yahoo's stake in Alibaba's revenue, operating income, etc. to its own if you wanted to do that now since the Equity Investment corresponds to a public company. If it's a stake in a private company, you can't really do much unless the parent company discloses the information to you (i.e. if you were working at a bank advising the parent company).
I thought the Enterprise Value is the DCF values (including the Terminal value) - Debt - Minorities + Cash & Eq. + Associates. Why are you adding debt and removing the rest?
You are confusing the terminology and calculations. The calculation you're describing is for moving FROM Implied Enterprise Value in TO Implied Equity Value in a DCF. In this tutorial, we're explaining how to move FROM Current Equity Value TO Current Enterprise Value in a standalone context.
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Great job in elaborating the textbook formula of EV in a real example! One question though - we do not typically make pro rata adjustment to the EBITDA because there is not enough information disclosed. But then with that limited information, isn't it equally difficult to come up with the value of the associate company (i.e. 100 in your example)? Sorry if I missed this part from previous videos....
Yes, but most Associate Companies are very small, and if they are bigger/more significant, most companies disclose the fair market values... or if they're stakes in public companies, you can look them up yourself.
Was asked the associates question in an interview at Bank of America - I damn right scratched my head and confused it for noncontrolling interest, although the interviewer helped out. Glad to have found this video at least for the next round of applications I guess.
Yeah, that happens, but usually if you correct yourself in the interview, everything is fine. Good luck!
You mentioned that simply adding the % of the associate company's EBITDA to the parent company's EBITDA would solve the problem of the EV/EBITDA ratio, as the market value of equity in the parent company reflects the % held in the associate company, but this is impossible in real life as the parent company does not disclose such figures. However, if we suppose that this information is available and we follow the procedure you mentioned, I believe the multiple would still be inconsistent. You would need to add the % of the debt held in the associate company to the EV, as well as subtract the % of the excess cash held in the associate company (even if in reality we might not have this information available).
Great video btw! :)
Yes, that is an issue as well. We mentioned this point not to make a comprehensive statement but rather to illustrate one problem with this approach and why no one really uses it in practice.
Thanks for the explanation ✌️.!
Thanks for watching!
When you showed the first option (which has increased the EBITDA of our parent company) you added 30% of the associate's EBITDA, which automatically will result in a higher FCFF and a higher EV. But if you do the second option (which is what most analysts do) you SUBTRACT the value of the equity investment from the EV. My question is, why do we subtract rather than adding? The two approaches seem inconsistent to me. Am I missing something?
Equity Value, unadjusted, includes 30% of the other company's market value. And if you calculate Enterprise Value starting with Equity Value and do not add/subtract anything related to Equity Investments, Enterprise Value will still include 30% of the other company's market value.
EBITDA, unadjusted, includes 0% of the other company's market value.
This is inconsistent because you want them both to contain 30% or 0% (or some other percentage that is the same).
So, you can either add 30% of the other company's EBITDA to bring that up to 30%, or you can subtract the "Equity Investments" (which represent 30% of the other company's market value) from Equity Value in the Enterprise Value calculation.
The goal is for both to include 0% or 30% of the other company.
hi- where can I get the excel template in the said example?
It's not available for this one (quite old content), but you can find similar files here:
breakingintowallstreet.com/kb/equity-value-enterprise-value/
mergersandinquisitions.com/equity-method-of-accounting/
Hi, thank you for the video!
I was just wondering what "value of associate company" stands for? EV or MVE?
Thanks!
Andrea Cantoni It stands for the Associate Company's Equity Value (Market Cap), or if it is not publicly traded, it stands for the Associate Company's Equity Value as determined via a valuation of the private company.
How would this look in an LBO context?
Do we also subtstract associates and add NCI if moving from EV to equity purchase price? (e.g. to set up the S&U).
Lets say we have an EV of 200 (20x multiple * 10m EBITDA), 20m associates, 10m NCI,5m unfunded pensions, 3m capital leases, 30m existing debt, 5m short term investments and 8m cash on the balance sheet
We raise 40m in debt. What would the S&U look lik
Thank you a lot!
These items should not appear in the Sources & Uses schedule of an LBO in 99% of cases because target companies rarely, if ever, change their ownership of these items, and no cash changes hands to correspond to them.
Hi, thanks for the great video as always!
In Yahoo!/Alibaba's case, if we subtract Yahoo's 26% stake in BABA from Yahoo's equity value, we end up with a negative number, which means that Yahoo now has negative multiples (EV/EBIT, EV/EBITDA, EV/Sales are all negative...). In this case, do people still calculate the multiples in this way? It seems that negative multiples don't make to much sense.
Why don't people do this:
1. If A owns
No, you would not do that in this case. Since Alibaba is a public company, you could just add 26% * Alibaba's figures to Yahoo's own financial figures and calculate the multiples like that.
But this only really works when the other company is a large public company like Alibaba with disclosed financial information - 99% of the time these Equity Investments correspond to private, closely-held / illiquid entities with no publicly available financial information, so it's not really viable to do this.
Mergers & Inquisitions / Breaking Into Wall Street Thanks a lot!
Hello Brian,
One question: what if these equity investments are needed for/involved with the company's core business operations. I.e. They fit the enterprise value definition. Would you still subtract the equity investment then when moving from equity value to enterprise value?
Yes, because even if they're somehow related to the company's business, accounting rules mean that they are presented on the financial statements differently... so you would run into consistency issues when calculating multiples such as EV / EBITDA.
in case you are looking at the cash flow statement, can you use the cash flow from operations, given that net income is already after EBITDA/EBIT (looking at apples-to-apples comparison)?
Thank you,
Roberto Sfeir
+roberto sfeir I'm not sure I understand your question. What are you using Cash Flow from Operations for? If you're using it as part of a valuation multiple, it has to be paired with Equity Value since CFO includes the net interest expense.
Or are you asking about how to adjust for Equity Investments within Cash Flow from Operations, or something else?
Hi, another great video. But I was wondering, how do you connect this reasoning of "Subtracting Equity Investments in order to compare aples-to-aples in Valuation Multiples" with the reasoning in other Videos, which is simply "It's a Non-Core-Business Item, and per definition of EV shouldn't be included in the EV". In other words, which of these arguments would you recommend giving in an Interview? Thanks!
It's better to say it's a non-core business Asset because the parent company owns less than 50% and, therefore, does not control it.
Hello, great video. One question, when doing a full DCF analysis for the combined company, is the common practice to project the Equity Investments line item (and include any dividend payments I get from that investment in the projected FCFs) or to ignore it and subtract the current value of Equity Investments to the discounted cash flows, once I have them, to get to EV?
No. Just ignore this line item in a standard Unlevered DCF, ignore income/expenses from it, and then add its value at the end when you're creating the bridge between Implied Enterprise Value and Implied Equity Value.
Thank you for the tutorial! I have one question regarding the equity value when there's equity investments. According to the tutorial, the equity value of the combine company is equity value of the parent plus 30% of equity value of the associate. However, when we do the BS for the combine company after equity investment, (asset side) we add equity investment, add 2 for equity invesment earnings and subtract cash for this investment; (equity side) we add 2 for retained earning. So does it mean that the equity value of the combine company should increase 2 after equity investment? Thank you!
Sorry, I don't understand your question. Equity Investments contribute to the company's Equity Value *implicitly* - in other words, the share price should already reflect the value of those equity investments. You don't do anything special when combining companies in a merger model context... just add together the Equity Investments on the buyer and seller's Balance Sheets. The price the buyer pays for the seller's equity should reflect the seller's Equity Investments as well.
Hello, thank you for your videos. I have a question: when doing the bridge from equity value to EV, we add minority interest and subtract associate, do we take the book or the fair market value of those items ? If we use the fair market value, how are we supposed to value them ? Isn't it too time consuming to find the market value (with traditional valuation methods) of each associate and minority interest each time we try to find the EV for a company ?
Thank you !
Ideally you will use the fair market values, but if there's not enough information to do so or these items are fairly small, you can just use the book values. It's rarely worth the time and effort to do this unless the Equity Investments or NCI correspond to publicly traded companies with easy-to-determine values or other high-profile companies that are easy to value, or they're very large. So in practice, most people just use the book values.
can I download this excel file? And where exact is it? Thank you!
This one is not available, but there are similar ones throughout the channel.
@@financialmodeling Hmmm Ok thanks!
If we subtract the equity investments from enterprise value, that means we value the parent company as if it didn't own the investment right? And in case we would want to calculate an acquisition price for the parent company we would still have to factor in the value of the equity investment to get a fair price?
Basically the only reason to do this adjustment is to get comparable metrics but not a fair value of the parent company?
Thanks for the video!
Yes, the main point of this adjustment is to create comparable metrics. In reality, the acquirer would still have to pay something for the equity investments of the parent company because the parent company's equity value (and stock price for public companies) will reflect the value of those investments.
Another reason for deducting "equity in associates" is to arrive to EV that is the same EV we get from DCF model i.e. in DCF computation NOPAT number is the number of only parent company (not combined). Consequently, FCF does not include cash flow from associate company. The question is: HOW do we correct unlevered FCF (or NOPAT) in DCF model so that we get fair acquisition EV?
Could you please comment whether my understanding is correct and answer one question? As I understand the reason for deducting "equity in associates" is to arrive to EV that is the same EV we get from DCF model i.e. in DCF computation NOPAT number is the number of only parent company (not combined). Consequently, FCF does not include cash flow from associate company. But how do we correct unlevered FCF (or NOPAT) in DCF model so that we get fair acquisition EV?
Yes, that is one reason you deduct Associate Companies or Equity Investments to move from Equity Value to Enterprise Value and why you add them when doing the reverse. But the main reason is much simpler: They're non-core-business Assets, so they should not be included in Enterprise Value.
You don't need to do anything special because if you calculate the purchase price based on a DCF, you get to Implied Enterprise Value at the end... and then you can back into Implied Equity Value, which represents the amount a buyer would have to pay for the seller's shares.
Thank you for the reply!
However, if I understood correctly, the EV calculated based on a DCF will be misleading in this case? And is there anything we can do to DCF to get correct EV in the first place? I just wonder if EV by itself (for other than backing into Implied Equity Value purposes) is used in practice? And if it does, is it acceptable to use this a little understated EV from DCF model in practice?
How would Implied Enterprise Value calculated based on a DCF be "misleading?" It's supposed to represent the PV of future, recurring cash flows from the company's core-business Assets that are available to all investors. Equity Investments or Associate companies are not core-business Assets, so cash flows from them should not be included in this number.
When another company wants to acquire this one, it has to pay at least this company's Equity Value, and that Equity Value *does* include the value of non-core Assets such as Equity Investments. You almost always calculate both Enterprise Value and Equity Value in valuation and modeling because they each have their uses and are useful in different contexts.
hmm I see.
Thank you very much!
Where is the file from the video?
It's not available for this one, but look at the newer tutorial on Equity Investments for an example.
You stated that the associate companies' income statement will not be disclosed except for Net Income. I don't understand this, if for example, Facebook buys 30% of Amazon stock, wouldn't Amazon be the associate company and Facebook be the parent company in this scenario, and wouldn't Amazon just continue running like a normal company and disclose the entire income statement? Thanks!
Sure, if Facebook buys 30% of Amazon, you can easily find the financial figures. But most deals like this are for smaller private companies where the financials are not disclosed. Also, sometimes companies group together the results of many different equity investments, so you can't necessarily separate them and establish which results belong to which company.
Thanks!!
I understand in both videos how you add non controlling interest to Enterprise calculating to reflect the 100% of the parent company's stake in the associate company as EBITDA reflects 100%, and same for subtracting equity investments to reflect EBITDA's 0% in the associate company. However is that just when you using valuation multiples such as EV/EBITDA to get an apples to apple comparison, however what if you were just calculating Enterprise value by itself and not using it for valuation multiples, would you not add noncontrolling or subtract equity investments because you want enterprise value to reflect the true value the parent company has in the associate company? THANKS! LOVE YOUR VIDS :)
You should do that even when calculating Enterprise Value on a standalone basis because Equity Investments are non-core-business Assets, and Noncontrolling Interests represent another investor group in the company (the minority owners of the company the parent owns a stake in).
Thanks!
Nicely explained :)
Thanks for watching!
Doesn’t this assume you know the value of the equity investment? Just like you often don’t have p&l for associate company, don’t you often not have the value (unless publicly traded)?
Companies always list at least the book value of the Equity Investment on their Balance Sheet or in their filings. If they do not, then it is because the Equity Investment is so small that it doesn't impact the company's valuation by much, in which case you shouldn't worry about it. It is better to use the market value if you can get it, but not all companies disclose that or even explain how you might be able to calculate it.
Hi, great video! just wondering, like you mentioned, if Yahoo's share price is so much effected by Alibaba, doesn't it make more sense to keep 40 % of Alibaba in yahoo's enterprise value calculation?
If this is just due to not possible to get the info of associate company's detailed income statement, is there anything we can do if we want to count Alibaba in the calculation of yahoo's EV?
If Yahoo disclosed all of Alibaba's financials on its own statements, then yes, you could keep its stake in the Enterprise Value calculation. The problem is that it doesn't disclose Alibaba's contribution to Yahoo's revenue, operating income, etc. and so you could never accurately calculate metrics such as EBITDA, and therefore you could not calculate multiples like EV / EBITDA with that approach. So you pretty much have to subtract its stake in Alibaba to calculate an Enterprise Value figure that you can actually use in multiples such as EV / EBITDA.
Mergers & Inquisitions / Breaking Into Wall Street Hi, thanks for your reply. does this happen to real life often: an associate company affects the parent company's revenue, share price, etc. so much, but without any accurate info, you have to subtract it? Is it a problem in real life?
E Chang Yes, that problem sometimes happens in real life but you really cannot do much unless you have better numbers for the other company. In this case, we could now actually adjust for this because Alibaba is a public company and we can easily get its numbers. So it would be possible to simply add Yahoo's stake in Alibaba's revenue, operating income, etc. to its own if you wanted to do that now since the Equity Investment corresponds to a public company. If it's a stake in a private company, you can't really do much unless the parent company discloses the information to you (i.e. if you were working at a bank advising the parent company).
great answer, thanks!
Do the BS and CF statement in minority interest cases also get combined?
Please see the lessons on Noncontrolling Interests. If the parent owns over 50% of the subsidiary, yes, you combine the statements fully.
I thought the Enterprise Value is the DCF values (including the Terminal value) - Debt - Minorities + Cash & Eq. + Associates.
Why are you adding debt and removing the rest?
You are confusing the terminology and calculations. The calculation you're describing is for moving FROM Implied Enterprise Value in TO Implied Equity Value in a DCF. In this tutorial, we're explaining how to move FROM Current Equity Value TO Current Enterprise Value in a standalone context.
Great video but if you speak a little slower it would be easier to follow. Thanks