WACC And Acquisitions

An article on CFO discusses the WACC for S&P 500 companies and the use of the WACC in mergers and acquisition. An interesting number in the article is that, according to research by Bain & Company, the average WACC for a company in the S&P 500 has dropped from 10 percent in 2010 to 8 percent in 2014. Much of this is likely due to lower interest rates. The article also discusses how companies add a risk premium of 200 to 300 basis points to the WACC (the subjective approach) when analyzing a potential acquisition, plus another 50 to 100 basis points due to conservatism about the WACC calculation. Although the article is not specific, we should reiterate the correct WACC to use when analyzing a potential acquisition is the WACC of the target company, not the WACC of the acquiring company. To clarify terminology, the hurdle rate used in the article is the required return, or cost of capital.