How cash and cash equivalents are treated in the M&A net debt bridge: what qualifies as free cash, restricted cash, and cash-like items.
Cash is the most straightforward-looking item in the net debt bridge — and yet it is surprisingly often the subject of disputes in M&A transactions. Not all cash on a balance sheet is "free" cash available to the buyer, and identifying what can genuinely be treated as a deduction from gross debt requires careful analysis.
Net debt = Gross financial debt − Cash and cash equivalents
Cash reduces net debt, which increases equity value. Sellers therefore want to maximise the cash classified as "free." Buyers want to restrict it.
Free cash is unrestricted cash held in operating bank accounts that:
In most clean corporate structures, the cash balance in operating current accounts qualifies without issue.
Restricted cash cannot be freely used by the business and should not offset gross debt:
The FDD analyst must review bank account schedules and identify any restricted balances.
In multinational groups, cash held in foreign subsidiaries may be practically inaccessible due to:
Buyers may argue that trapped cash should be haircut or excluded from the net debt deduction. This is particularly relevant for companies with operations in emerging markets.
Some non-cash assets are treated as equivalent to cash in the equity bridge:
Whether these are included as cash-like items in net debt must be agreed in the SPA definition.
If cash overseas would incur withholding tax on repatriation, some buyers argue for a haircut to reflect the net-of-tax amount. This is contested — sellers argue the gross amount should count, since the company might use the cash locally rather than repatriating it.
Cash in the equity bridge is less simple than it looks. The FDD analyst who reviews cash balances systematically — rather than taking the balance sheet at face value — demonstrates the analytical rigour that TS teams require.
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