- The Skinny on Wall Street
- Posts
- The Skinny On...
The Skinny On...
DA | Wiz
The Wall Street Skinny
March 27, 2025
This Week on The Floor
Quick update from your besties at TWSS:
Kristen is polishing up edits on our SECOND self-paced course, M&A: Fundamentals to Advanced Modeling, which we’ll be rolling out this Spring!
This is an M&A-heavy newsletter edition, and we are opening up our waitlist for the course to newsletter subscribers today!
Newsletter subscribers will also have exclusive early access and special bonuses, so stay tuned.
And, speaking of Acquisitions….
We chatted a little on the podcast last week about the record-breaking purchase of the Boston Celtics. Its $6.1bn price tag surpassed the prior high print for an American sports team: the $6.05bn paid by Harris-Blitzer Sports Entertainment Group for the Washington Commanders.
On Saturday, we’re publishing an in-depth interview with billionaire investor David Adelman, who is not only one of the partners in HSBE, but also a part-owner of the Philadelphia ‘76ers, the NJ Devils, and the Premiere League football team Crystal Palace. We got his unparalleled insight into sports investing across the NBA, NHL, NFL, and Premier League, alongside his incredible teachings on real estate, asset management, and venture investment.
DO NOT MISS THIS EPISODE!!
Google announced its largest acquisition ever in bid to compete with Microsoft on cybersecurity. We’ve got the skinny…
Private Equity firms are lobbying for tax relief. We’re breaking down why it matters and what you need to know to elevate your LBO expertise
Build Excel Models Faster with Training The Street Turbo Macros
If you’re a junior banker (or about to be), Excel is your battlefield. You’re building complex, airtight models where every formula has to be flawless, and every format spot-on.
Speed and precision aren’t just nice to have—they can be the difference between landing a top-tier analyst ranking (and a much bigger bonus) or getting stuck in the middle of the pack.
But let’s be real — native Excel only gets you so far. That’s why top bankers use Training The Street’s Turbo Macros.
✅ Quickly toggle number and color formats
✅ Trace precedents and dependents in one click
✅ Skip the clunky workarounds Excel never solved
Built by former bankers, for bankers — Turbo Macros fill in the gaps where Excel falls short.🚀
Ready to model faster? Start your free TTS trial today.
Markets Recap / Deal News
Interviewing this week? Here’s some content for your conversation.
Google Acquisition of Wiz: Strategic Insights & Financial Impact
Google’s recently announced acquisition of cybersecurity firm Wiz marks its largest purchase ever, emphasizing the importance of “cloud security”.
Strategic Rationale
As cloud adoption grows, security has become critical. Wiz, a five year old company, provides comprehensive security across multi-cloud platforms (like AWS, Azure, and Google Cloud). Integrating Wiz enhances Google’s cloud capabilities and addresses customers’ rising demands for data protection.
Deal Analysis: Why an All-Cash Transaction Makes Sense
When companies consider how to finance an acquisition, they typically weigh whether cash or equity provides the least dilution and greatest financial benefit to shareholders.
An easy way to calculate this is to compare the Price-to-Earnings (“PE”) ratio of Google’s stock with the “PE of Cash”, which estimates the cost of using cash (assuming that cash comes from raising debt).
The Intuition behind the PE of Cash
The PE of Cash reflects how expensive raising debt is compared to issuing equity.
It is calculated as the inverse of the after-tax cost of debt (1 / after-tax cost of debt). This metric represents the expected earnings loss from interest expense from issuing debt.
Let’s quickly walk through the math:
Stock PE
PE = Stock Price / Expected EPS
Alphabet’s stock price day prior to deal announcement = $172
Alphabet’s expected 2025 EPS: $8.98
PE = $172 / 8.98 = 19.2x
PE of Cash
PE of Cash = 1 / after-tax cost of debt
Step 1: Evaluate Alphabet’s pro forma leverage (riskiness) assuming deal entirely financed with debt.
Alphabet’s current EBITDA: $129bn
Pro Forma EBITDA (assuming no increase from Wiz): $129bn
Current Debt: $28bn
Incremental Debt: $32bn (assuming cash consideration comes entirely from debt)
Pro Forma Debt Post-Deal: $28bn + 32bn = $60bn
Pro Forma Leverage Post-Deal: $60bn / 129bn = 0.45x
Given the pro-forma leverage is low, we can assume Alphabet will likely maintain its AA credit rating.
Step 2: Estimate interest rate based on riskiness.
AA credit spreads are around 50 basis points. We can conservatively estimate the risk free rate at 4.50% at time of issuance, giving us an all-in interest rate of 5.00%.
Step 3: Calculate P/E of Cash.
Corporate Tax Rate: 25%
After-tax interest cost: 5.00% x (1 - 25%) = 3.75%
Implied PE of Cash: 1 / 3.75% = 26.7x
Final Step: Compare PE of Stock to PE of Cash
PE of Stock (19.2x) < PE of Cash (26.7x)
PE of Cash wins!
Time to Google Wix…
Share Price Reaction and Dilution Analysis
Alphabet’s stock initially fell 2.2% on the announcement, reflecting investors’ concerns about dilution in the near term. Investors want deals to be accretive, not dilutive.
In order for the deal to become accretive, Wix’s net income and synergies have to exceed the incremental after-tax interest expense that Google pays to finance the deal (3.75% x $32bn = $1.2bn).
Given Wiz’s 2024 revenue was only $500mm, and even with the insane projections for it to hit $1bn in 2025 (a 100% increase!), there’s virtually no chance this deal is accretive in the first few years based on Wiz’s net income alone.
But Google’s likely betting on revenue synergies from combining their business operations to offset that increased expense.
And finally, we wanted to highlight the absolutely MASSIVE breakup fee in this deal. If it fails to close for any reason — including antitrust laws, which pose a very real risk — Google has to pay Wix $3.2bn!
This deal is a great case study for any interviews you might have coming up…and we’d love to hear your thoughts on Google’s strategic move!
Private Equity firms want their “D&A”…what it means, and why it matters!
Private Equity firms are lobbying to increase their tax deductions on interest, potentially ADDING to the already-giant Federal deficit. Should they be allowed to?
Prior to 2017, companies could deduct the full amount of interest paid on their debt.
Interest deductions work like this: say you earn $100, and pay $10 in interest. Your taxable income is calculated as $100-10, or $90.
Earn $100 and pay $100 in interest? No problem, you pay no taxes.
Fast forward to 2017, when the first Trump administration issued a series of tax cuts. In order to fund those tax cuts, they limited deductions elsewhere. You may remember the “SALT” (State and Local Taxes) deduction changes, where property taxes and other items on your personal balance sheet suddenly became much more burdensome.
They also changed accounting for interest payments. They placed a NEW LIMIT on the amount of interest companies — and individuals — could deduct.
For companies, they framed the limits on interest deductions in terms of EBIT and EBITDA — two of bankers’ favorite terms.
So before we explain the limitations, we need to quickly define these terms.
EBIT and EBITDA
EBIT stands for Earnings Before Interest and Taxes, and is your proxy for operating income, a.k.a., how much you earn from running a business.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a proxy for your cash flows.
EBITDA is simply calculated by taking your EBIT and adding back in your depreciation (how much you are writing down the value of assets that depreciate over time), and amortization (how much you’ve paid down your debt).
Said plainly, EBITDA = EBIT + DA.
As you can see, EBITDA should always be a higher number than EBIT. For the sake of our example, let’s say EBIT is $100 and EBITDA is $150.
Following the Trump tax cuts, companies could deduct up to 30% of EBITDA.
If you earned $100 of EBIT and had $50 of D&A, if you had $100 in interest, you could deduct: 30% x $150 = $45. You’d pay taxes on $100 - 45 = $55 worth of income.
In 2023, that limit dropped to 30% of EBIT. Since we know EBIT should theoretically be lower than EBITDA, that means the deductible amount was also therefore reduced.
So if you earned $100 of EBIT and had $50 of D&A, if you had $100 in interest, you could deduct: 30% x $100 = $30. You’d pay taxes on $100 - 30 = $70 worth of income.
Paying taxes on $70 worth of income is more than paying taxes on $55 worth of income.
The result?
Companies like those bought by PE firms in Leveraged Buyouts with massive amounts of debt have a higher tax burden.
Combined with the selloff in interest rates we’ve seen over the past 3 years, financing these deals has become even more expensive.
10 Year US Treasury Yields (source: CNBC)
So it’s easy to understand why Private Equity firms are now lobbying to get D&A reinstated in the calculation. And to be clear, the relief wouldn’t just benefit Private Equity portfolio companies…but all companies employing leverage.
However, according to Bloomberg, this would result in an almost $180bn increase in the U.S. Deficit over the next ten years — a definitive blow to the second Trump administration’s stated goal of reducing the deficit. It remains to be seen how the scales of pro-business policy and deficit reduction strategies will balance out.