Equity Bridge

An equity bridge is the reconciliation from Enterprise Value to equity value. Starting from the total value of the company, net financial debt and other adjustments are deducted or added. The result is the amount that actually belongs to the shareholders.

The typical calculation starts with the negotiated enterprise value, deducts financial liabilities, adds freely available cash, accounts for debt-like items such as pension obligations, leases, unpaid bonuses, provisions and outstanding taxes, and finally corrects the deviation of actual working capital from the agreed normal level. Each of these positions is a negotiation in its own right, and because they feed one for one into the price they often decide more money than the debate about the multiple. The most contentious points are the definition of freely available cash, since operational balances and funds in foreign subsidiaries are not readily accessible, and the boundary between debt-like items and working capital, since otherwise the same position is deducted twice. In practice the bridge is first prepared on the latest available figures, underpinned in the purchase agreement with binding definitions and then, depending on the pricing mechanism chosen, either fixed at a past reference date or adjusted after completion through completion accounts. This term should be distinguished from the similarly named bridge facility at fund level, used to bundle capital calls on investors.

It is advisable to maintain the bridge as a worksheet from the outset, showing the definition, amount and evidence for each position, because disputes almost always arise over individual items rather than the methodology. Looking at several reference dates is equally worthwhile, since net debt and working capital fluctuate considerably during the year and a single date gives an accidental picture. That is also what drives the choice between the two common pricing mechanisms.