Acquisitions: What Is The Right Price?

The announcement of Dell’s plans to aquire Perot Systems, got me thinking: how do you place the proper price tag on an acquisition?

All M&A activity includes due diligence, but there have been several cases where the price has NOT been right.

Photo by DeclanTM, courtesy of flickr

When a firm is acquired, many people look at the firm’s market capitaliziation for an idea of what the firm is worth. However, Enterprise Value (EV) is often thought of as a firm’s takeover valuation.

According to Investopedia, EV is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

The extra items are important considerations since the takeover target’s assets and debts are taken on by the firm doing the purchasing.

Market cap is also a measure of equity, but since it fails to include a company’s debts or cash, it may not provide an accurate reflection of a firm’s value.

Today, Perot’s enterprise value is approximately $3.42 billion. Its market cap sits around $3.58 billion, but these figures reflect a stock price increase of 65 percent (on 90+ times typical trading volume) that came AFTER the acquisition was announced.

So, did Dell get it right? We’ll have to wait and see.