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FIN-TRANSACTION - Compare an acquisition price with value and available funding

  • Situation: An operating business is valued at 100, and the buyer is considering paying 100 for its equity.
  • Question: What value would the buyer obtain at the proposed price, and can the purchase be funded on that basis?
  • First useful result or blocker: A transaction comparison that includes the acquired claims and buyer’s incremental effects, with the funding condition still needed for action.
  • Start with: FIN.7 if the value of the acquired interest is unresolved; FIN.9 if that value is already supplied.
  • Stop or return: A supported conditional recommendation can finish the advice. Return to the affected value or funding calculation when price, included claims, benefits or payment conditions change.

In FIN.7’s constructed case, operating enterprise value is 100. Debt with market value 30 remains in the acquired company, and included excess cash of 10 is freely transferable after closing. With no other claim adjustment, standalone equity value is 100 − 30 + 10 = 80. That is the interest value FIN.9 uses to compare with the equity price.

The buyer-specific benefits have present value 30, while integration and other incremental costs have present value 15, on the same date, currency and after-tax basis. At price 100, buyer value is 80 + 30 − 15 − 100 = −5. At price 90, it is +5. The +5 is a conditional financial result. FIN.2 uses the purchase payments and their dates in the buyer’s cash account. The acquired cash of 10 becomes available after closing and cannot fund a payment due before then. If the buyer needs external funds, FIN.10 compares obtainable terms by net proceeds, availability and later payments. A material change to debt and equity mix calls for FIN.11; a relied-on borrowing restriction calls for FIN.12. These results can change whether the purchase is available and what financing effects enter the valuation. Count any such effect once on a matching basis.

FIN.16 combines the value comparison with those funding results for the buyer’s decision. It can return a price-conditioned recommendation or the funding condition preventing action. If the expected benefits change, FIN.17 returns their consequences to FIN.9; if the acquired debt or cash differs from the valued interest, return to FIN.7 before retaining the +5 conclusion. Using the recommendation for action still depends on the assumed consents and ability to realize benefits. When the buyer must compare the acquisition with a capital project and a paid expansion right, use the connected capital-use example in FIN.9. It constructs the values and feasible combinations at one date.