Enterprise Value - Cash, how much is too much?

One interesting note made by our professor, Heather Ann Irwin, was for calculating EV.

I've learned the two basic ways to calculate EV (again in theory they should work out to be the same):

EV = EBITDA x Multiple
or
EV = Market Capitalization + Net Debt

Where
Market Capitalization = Share Price x # of Shares
Net Debt = Long Term Debt + Short Term Debt - Cash and Equivalents

I've been told there are more sophisticated versions of EV which include:
+ Preferred Shares
+ Minority Interest

And that the reason we use EV is to look a the company's value assessed under a capital structure neutral scenario (because the capital structure will change when you acquire it).

What I wanted to focus on is the Net Debt component, specifically cash and equivalents. Heather Ann Irwin mentioned a version of the formula which uses "excess cash" instead of cash. I had an idea what she meant but I asked her to clarify. She confirmed my perspective of her idea:

You subtract cash from net debt (and from EV) because cash has a special relationship as a highly liquid asset, so it is often seen as different from other working capital accounts (such as AR, Inv or Prepaid Exp). However, a company still requires some cash to run. The assumption of removing cash from net debt implies that you are acquiring the company for it's "raw" value. Leaving the cash in the company's EV is like buying cash with cash.

However, Heather Ann Irwin proposed that instead of "cash and equivalents" we should use "excess cash". This subtle difference is rather interesting. Yes, cash has a special relationship and is therefore different than other current accounts and working capital, however, you still need SOME cash in order to operate and maintain liquidity. But you don't want ALL the cash (you don't want to have to raise more funds than you need or else you risk screwing up your WACC when you try to raise too much funds). So rather than cutting out all the cash (or none at all) she is suggesting that you remove the excess cash, cash that is not necessary.

In other works, there is some cash which should be treated like working capital because it is actively employed in keeping the company running. The other "cash and equivalents" which are relatively stagnant should be excluded from the EV calculation. When I asked her what constitutes "excess cash" and how would you determine it, she had a great answer: Look at the liquidity ratios and do comps analysis. I'd have to think that it would also be prudent to look at the cash cycle.

I guess this is one of those subtle points that would probably come up in the negotiation of an M&A deal if someone was thinking of acquiring a company. It would probably come up as a point of discussion in terms of the strategic nature of the acquisition and the target capital structure after the deal was done.