Merger and acquisition valuation methods

Aswath damodaran 3 steps involved in an acquisition valuation n step 1. In theory, valuation of a company can be based on a wide variety of models ranging from highly analytical to highly intuitive. A relative valuation is based on various methodologies and various. Merger accounting steps in acquisition method of accounting. Company valuation, merger and acquisition, discounted cash flow method 1. Valuation methods three main approaches to value a business. Methods of valuation for mergers and acquisitions solution. And, as with most negotiations, valuation is more art than science. In order to understand the logic underlying valuation methods, background knowledge on merger and acquisition will be provided. They can be used for internal understanding of business worth for management, investors and equity holders. Mergers and acquisitions are a part of the increasingly expanding corporate world. Generally, when valuing a company, there are two different ways to approach the valuation of the company. The acquiring firm records the assets and liabilities of the acquired firm at market value, with goodwill capturing the difference. Steps involved in an acquisition valuation n step 1.

Outline introduction pricing of mergertakeover rules for valuation pricing estimators book value of. Random sampling was used to obtain records of valuation methods and mergers and acquisitions that occurred between 2006 and 2016 from companies in the hightech sector. Ferris, a valuation and acquisition consultant to small and midcap companies in central america, served on the fac ulty at northwesterns kellogg school of management. They need to look at their return on their investment. It may be felt that the market based method is the most relevant, but all three methods are significant depending upon the situation prevailing during the course of the mergers as well as acquisitions. In this module, we will concentrate on merger analysis, also known as merger consequences analysis. The valuation of operating assets can be done using two different fundamental concepts. Interested parties during a merger, acquisition, or sale need to obtain the best fair market price of the business entity. This thesis discusses merger and acquisition and introduces the method and framework to effectively value and price a company in merger and acquisition context. A dcf valuation is centered around the sum of the forecastfree cash flows of a company say, over a five year period and discounting them by the companys weighted average cost of capital the cost of equity andor debt used to finance the company and the required return to make a capital project worthwhile to arrive at a present value. It may be felt that the market based method is the. Each of these topics, including acquisition comparables, is very important in investment banking and is discussed in a previous module in this training course. Valuation, leveraged buyouts, and financing is an approach towards understanding the musings of the world of mergers and acquisitions. Dcf is tricky to get right, but few tools can rival this valuation method.

Methods of valuation for mergers and acquisitions discounted. Several valuation methods are available, depending on a companys industry, its characteristics for example, whether it is a startup or a mature company, and the analysts preference and expertise. What is the difference between a merger and an acquisition. Outline introduction pricing of mergertakeover rules for valuation pricing estimators book value of the target firm liquidation value of the target firm replacement cost of the target firm current market value of the target firm trading multiples of peer firms transaction. Valuation related to mergers and acquisitions world finance. Company valuation, merger and acquisition, discounted cash flow method. This master thesis evaluates an acquisition of 21st century fox by the walt disney company, the two media giants inside the us market and beyond. Valuation methods posted on november 18, 2016 july 23, 2017 by john kennedy generally, when valuing a company, there are two different ways to approach the valuation of.

Apr 28, 2017 valuation of mergers and acquisitions 1. Most of the analysis in investment banking and private equity contemplates valuing a business as a going concern, though liquidation valuation is used occasionally, especially when considering distressed companies. Valuation related to mergers and acquisitions usually follow these three methods. Business valuations company appraisals proforma business. Ebitda or other metrics figure 2 depicts the various up and downside factors which may be associated with an acquisitionmerger and therefore. Value the target with the acquisition motive built in. Valuation methods posted on november 18, 2016 july 23, 2017 by john kennedy generally, when valuing a company, there are two different ways to approach the valuation of the company.

Do mergers and acquisitions create shareholder value. The valuation of mergers and acquisitions part 1 acca afm lectures duration. For the case described in example 1, corporate managers, investors, regulators, and a bevy of advisersincluding investment bankers, financial analysts, lawyers, and accountantseach evaluated the various offers from a variety of perspectives. Priceearnings ratio pe ratio with the use of this ratio, an acquiring company makes an offer. However, many times, a merger or acquisition is given a go ahead, even though there is a possibility of it being unprofitable. A wellproduced business valuation can provide a 30,000 foot view of how the business operates. For the case described in example 1, corporate managers, investors, regulators, and a bevy of advisersincluding. Standard merger deals typically involve administrators, lawyers, and investment bankers even before the total acquisition cost is considered. Valuation of mergers and acquisitions linkedin slideshare. Ebitda or other metrics figure 2 depicts the various up and downside factors which may be associated with an acquisition merger and therefore, the factors which may need to be considered in arriving at ebitda or other metrics. Why valuation matters valuation methods valuation destroyers. Methods of business valuation process in india enterslice. To financially evaluate a merger or acquisition, the acquirer company should first determine whether the asking price is reasonable.

There are many ways to value a business, which can yield widely varying results, depending upon the basis of each valuation method. Decide on the mode of payment cash or stock, and if cash, arrange for financing debt or equity. In fact, some call it alchemy because valuation is often subjectivity masquerading as science and logic. In practice, valuation of acquisition and divestiture targets results from one or a. The valuation engagement sooner or later every business owner needs a reliable company valuation for one or more of a variety of reasons. Below is a detailed look at the best financing options available today as. Most of the analysis in investment banking and private equity. An enterprise murphy merger and acquisition advisors 1 8. An enterprise murphy merger and acquisition advisors 1 8 3052750. Nov 02, 2015 apv method in merger valuation duration. Acquisition valuation involves the use of multiple analyses to determine a range of possible prices to pay for an acquisition candidate. Need for valuing shares or businessas far as unlisted companies are concerned the price of shares of such company is notreadily available, so we need to determine the value of shares of such companies, but this isnot the case with the. In practice, valuation of acquisition and divestiture targets results from one or a combination of three methods. This thesis discusses merger and acquisition and introduces the method and framework to effectively value and price a company in merger and.