Issues in Acquisition Valuation
Acquisition valuations are complex, because the valuation often involved issues like synergy and control, which go beyond just valuing a target firm. It is important on the right sequence, including
• When should you consider synergy? • Where does the method of payment enter the process.
Can synergy be valued, and if so, how? What is the value of control? How can you estimate the value?
Steps involved in an Acquisition Valuation
I I I I
Step 1: Establish a motive for the acquisition Step 2: Choose a target Step 3: Value the target with the ...view middle of the document...
Higher growth: should have potential for higher growth. Financial Synergy Tax Savings: provides a tax benefit to acquirer Debt Capacity: is unable to borrow money or pay high rates Cash slack: has great projects/ no funds Control badly managed firm whose stock has underperformed the market. Manager’s Interests has characteristics that best meet CEO’s ego and power needs.
Step 3: Value Target Firm with motive built in
If motive is Target firm Undervaluation Value target firm as stand-alone entity: No extra premium Diversification Value target firm as stand-alone entity: No extra premium Operating Synergy Value the firms independently. Value the combined firm with the operating synergy Synergy is the difference between the latter and former Target Firm Value = Independent Value + Synergy Financial Synergy Tax Benefits: Value of Target Firm + PV of Tax Benefits Debt Capacity: Value of Target Firm + Increase in Value from Debt Cash Slack: Value of Target Firm + NPV of Projects/ Target Control Value of Target Firm run optimally Manager’s Interest Value of Target Firm: No additional premium
The Valuation Process
VALUING AN ACQUISITION
Should you pay?
Value the combined firm with synergy built in . This may include a. a higher growth rate in revenues: growth synergy b. higher margins, because of economies of scale c. lower taxes, because of tax benefits: tax synergy d. lower cost of debt: financing synergy e. higher debt ratio because of lower risk: debt capacity Subtract the value of the target firm (with control premium) + value of the bidding firm (pre-acquisition). This is the value of the synergy.
Which firm is indispensable for the synergy? If it is the target, you should be willing to pay up to the synergy. If it is the bidder, you should not.
Value the company as if optimally managed. This will usually mean that investment, financing and dividend policy will be altered: Investment Policy: Higher returns on projects and divesting unproductive projects. Financing Policy: Move to a better financing structure; eg. optimal capital structure Dividend Policy: Return unused cash Practically, 1. Look at industry averages for optimal (if lazy) 2. Do a full-fledged corporate financial analysis
If motive is control or in a stand-alone valuation, this is the maximium you should pay.
Status Quo Valuation
Value the company as is, with existing inputs for investment, financing and dividend policy.
If motive is undervaluation, this is the maximum you should pay.
Valuing NCR for AT & T
VALUING NCR for AT & T
Value $ 11,278 million - $ 6,723 million = $ 4,552 million
Value the combined firm with synergy built in . This may include a. a higher growth rate in revenues: growth synergy b. higher margins, because of economies of scale c....