Mergers & Acquisitions

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Introduction:

There are several types of valuation techniques used in acquiring business. It is the objective of the acquirer that determines the technique he selects. Mergers are recommended when they bring in strong synergistic effect. However, the method of financing a merger should be selected carefully.

1. Describe the different types of valuation techniques discussed in the text or in class. Compare and contrast the different techniques and discuss why a company would use one or another.

2. There are several types of a valuation techniques that a company may used for valuation. One valuation technique is the asset based technique. In case of asset based valuation is that an investor should pay for business assets the actual cost of procuring the assets. In other words the value of the business is the sum total of its individual assets. The difficulty is that most assets are shown in the financial statements as their original cost less depreciation. The value of these assets should be adjusted to the fair market value if possible. However assets like the goodwill which are intangible are very difficult to find out and so this method is difficult to use. Moreover, only if the shareholder that is acquiring the business has the authority to contact the assets after merger, sell those assets and distribute the proceedings to shareholders, there is not direct benefit that the purchaser will get. One of the most common methods of evaluating the business is the capital asset pricing model. This method helps determine the correct discount rate in business valuations. The CAPM method gets its discount rate by adding a risk premium to the risk-free rate. The risk premium is derived by multiplying the equity risk premium times 'beta', which measures risk volatility. The CAPM method belongs to a family of methods called the income method. These approaches find the fair market value by multiplying the benefit stream generated by the company or the target company times a capitalization rate there are several types of income approaches that include the excess earning methods, the discounted future cash flows and capitalization of cash flows. In case of the DCF method a discount rate or capitalization rate is used to determine the present value of the expected returns of a business. In addition, there are market based approaches. This method is based on the assumption ...