Cash and Equivalents in the Net Debt Bridge
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.
The Basic Principle
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.
What Qualifies as Free Cash?
Free cash is unrestricted cash held in operating bank accounts that:
- Is immediately accessible
- Has no legal or contractual restriction on its use
- Does not relate to a specific liability already included in net debt
In most clean corporate structures, the cash balance in operating current accounts qualifies without issue.
Restricted Cash: Excluded from Net Debt Deduction
Restricted cash cannot be freely used by the business and should not offset gross debt:
- Cash pledged as collateral: If a bank account is pledged to support a loan or guarantee, it is restricted.
- Escrow accounts: Cash held in escrow pending resolution of a specific obligation.
- Deposits under regulation: Certain regulated industries require minimum cash reserves.
- Client money: Professional services firms or financial intermediaries holding client funds.
The FDD analyst must review bank account schedules and identify any restricted balances.
Cash Trapped Overseas
In multinational groups, cash held in foreign subsidiaries may be practically inaccessible due to:
- Repatriation restrictions in certain jurisdictions
- Withholding taxes on dividends
- Foreign exchange controls
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.
"Cash-Like" Items
Some non-cash assets are treated as equivalent to cash in the equity bridge:
- Short-term financial investments (money market funds, treasury bills maturing within 90 days)
- Deposits held with financial institutions with short maturities
- Intercompany receivables from related parties that will be settled at closing
Whether these are included as cash-like items in net debt must be agreed in the SPA definition.
Tax on Trapped Cash
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.
Practical FDD Steps
- Obtain a bank account schedule as at the reference date
- Identify any restricted or escrow accounts
- Check for trapped cash in foreign subsidiaries
- Agree the treatment of short-term investments with the client
- Document the cash balance used in the net debt calculation with full supporting evidence
Conclusion
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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