Enterprise Value and Equity Value: the role of Bridge to Equity in M&A transactions

In M&A transactions, the purchase price is often the main focus, but the figure that appears in preliminary offers is almost never what will end up in sellers' pockets. Often that figure is the Enterprise Value (EV), a value that captures the company as if it was free of debt and cash: the famous cash-free, debt-free. However, this is not the real price. To arrive at the value that sellers are entitled to, a crucial step is needed: the Bridge to Equity.

Enterprise Value represents the total value of company's operating activities, independent of its financial structure. It is an economic measure that looks at the company as a whole, as if it was financed through a single source of capital. Equity Value, on the other hand, is what belongs to the shareholders, after excluding financial assets and liabilities. The bridge between these two worlds is the Bridge to Equity: a set of items that can (sometimes radically) change the final result.

The importance of Bridge to Equity is strictly related to transactions’ negotiation, since such value includes items such as financial debt, debt-like liabilities, working capital adjustments, tax items, leases and accrued bonuses.

Bridge to Equity as a core negotiation element

Imagine an offer with a very high EV: it looks like a bargain, but if the Bridge to Equity is full of items that reduce the value, the price for sellers can plummet. That's why it's necessary to focus on contractual definitions as well as numbers: debt, operating cash, working capital are – inter alia – essential definitions to be negotiated and defined within the SPA in order to determine the Bridge to Equity.

Indeed, the definition of Bridge to Equity in M&A transactions shall not only be reduced to accounting matters but it becomes essential, both on sell and buy side transaction to understand every single aspect behind the relevant definitions. For such reasons, for negotiation purposes, Bridge to Equity can be used to make an offer more attractive by inflating the EV and shifting the discussion to the details. In other cases, it can be used to defend the equity price by inserting clear clauses and adjustment mechanisms, such as completion accounts or locked-box purchase price mechanism, peg and collar on working capital.

Purchase price adjustment mechanisms

On this point, it shall be highlighted that the legitimacy of price adjustment clauses has been addressed in several court decisions (see, among others, Supreme Court no. 9347 dated 05.04.2023). Such clauses serve as contractual mechanism for determining the definitive purchase price, particularly when the price reflects the monetary expression of a balance sheet or income-based parameter of the target company. As noted in the aforementioned Supreme Court decisions, these adjustment mechanisms are fundamentally different from indemnity clauses: the former are designed to establish the definitive price, while the latter aim to compensate the buyer upon the occurrence of specific liabilities.

Timing matters: signing, closing and the interim period

Another crucial aspect concerns the timing of the transaction. The interim period (the period occurring from signing date to closing date) can lasts form months for different reasons (e.g. preclosing covenant such as corporate reorganisations) and many items composing the Bridge to Equity may vary over time. This opens the door to price adjustment mechanisms and claw-back clauses: if the price depends on future targets, the real value for the seller must be calculated immediately, taking into account risks and possible reductions.

Bridge to Equity as a negotiation lever

Based on the above, it is possible to say that Bridge to Equity also functions as a negotiation lever. Some purchasers use it as a tool for ‘reverse engineering’: they begin with the equity value they are willing to pay and construct a higher Enterprise Value by adjusting the bridge components accordingly. This can make the offer appear more generous, even though the actual cash proceeds for shareholders remain unchanged. Sellers must therefore be well prepared: transparent definitions, comprehensive supporting schedules and clear valuation criteria are essential to avoid unexpected calculations.

In conclusion, Enterprise Value and Equity Value are two sides of the same coin, but Bridge to Equity is the mechanism that determines how value is ultimately allocated. In M&A transactions, the decisive dynamics unfold within this bridge, through definitions, adjustments, interpretation and most of all negotiations. Those who assume that the price is merely a headline figure risk realizing too late that the true value was embedded in the underlying details.