Friday, February 16, 2007

Another Merger Note Creates Deeper Confusion

February 16, 2007

Bob Peck of Bear Stearns issued a note today regarding a merer, and once again, there seems to be some confusion over how these comapnies would be valued in the event of a merger.

The most common error made is when investors look at Market Cap rather than Enterprise Value.

Enterprise Value is a far better metric when it comnes to company valuations because it considers many factors that market cap does not consider.

So what is Enterprise Value, and why is it a more accurate measure of the value of a company??

Enterprise Value is a figure that theoretically represents the entire cost of a company if someone were to acquire it.

Enterprise Value includes a number of important factors such as debt, preferred stock and cash reserves. Market Cap does not take these important metrics into consideration.

Enterprise Value is calculated by adding a company's :

Market Capitalization
Preferred Stock
Outstanding Debt

Then Subtracting:

Cash Equivalents from the balance sheet

Simply stated, Enterprise Value is what it would cost to buy a company’s shares of common stock, preferred stock, and outstanding debt.

Basically, investors need to look at the Enterprise Value of these companies as they try to consider various merger situations.

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2/16/2007 08:45:00 PM

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