VALUATION OF MERGERS AND ACQUISITIONS DEALS

In today’s cut throat business world, companies are bound to compete with one another to stay on top. However, there is always scope and there are always some business entities that are better in some aspects than others. Your business continues on its way to grab any opportunity it can to succeed, so does the opponent. Some of those opportunities include eating up your competitor (acquisition), shaking hands with the opponents (mergers), or buying the competition (takeovers).?

“Coming together is a beginning, staying together is progress, and working together is success.”

All these decisions require analysis of trends, financial reports, policies, regulations, legal aspects and many other financial and non- financial decisions that require huge capital, intellect and time inflow. Thus, both the parties often value the deals differently. On one hand the buyer wants the best deal at the lowest cost and financial interference, and least component of liability in the deal. On the other hand, the target company requires a business combination that values itself at a premium price, provides sufficient control and financial independence in the new arrangement.

The answer to why valuations are needed is to define tax or legal requirements arising in the ordinary course of business in an organization. However, valuations are actually performed for but not limited to selling or acquiring a business. In the cases of death, disability, disaster, or divorce, valuations are needed to equitably determine the business assets according to terms spelled out in legal filings. Considerations that have a deep influence on the value of the target company include goodwill, the value of patents rights, trademarks, and other intangible assets, the dependency on an owner or key managerial persons, target market, market position, and the competitive landscape of the industry. Valuations are often needed when gifting or donating company stock as part of a charitable contribution. There could be requirements in a buy/sell, partnership, or shareholder agreement that necessitates a business valuation.?

In order to assess the true value of an entity, there are three different approaches i.e., Asset-based approach, Income?approach, and Market approach. Either a single approach or a combination of the three approaches can be used while determining the value a business offers.?

1. Asset-Based Approach is also called the net asset approach. In this method of valuation, the company is valued at the fair value of all its assets less the payable value of external liabilities making it one of the easiest and most straightforward approaches of all. The said approach is employed for valuation in a going concern company as well as on a company with a liquidation basis. This approach is also employed when a target company has a reasonable amount of tangible assets with substantial useful life.?
2. Income Approach defines the value of the target company equal to the future benefit of its revenue streams, discounted to the current value post reflecting the investment risk and time value of money. Both net cash flow and dividends form income inflows while determining the value of the target company This estimation is known as economic income.?
3. Market Approach states that during the process of valuation, the acquiring company must compare the target companies used. The assumption in this method is that the total value of the company is estimated by determining the current value of the projected future earning and the current value of the terminal value. The valuator in this method must be satisfied that the projected earnings are backed by the assumptions of the management and constitute reasonable future earnings.?

Here are the techniques to value a business:

• Discounted Cash Flow (DCF) Method: The target’s value is calculated based on its future cash flows.
• Comparable Company Analysis: Relative valuation metrics for public companies are used to determine the value of the target.
• Comparable Transaction Analysis: Valuation metrics for past comparable transactions in the industry are used to determine the value of the target.?

Thus, valuation is an important part of mergers and acquisitions (M&A), as it guides the buyer and seller to reach the final transaction price.