Valuation Related to Mergers and Acquisitions

The methods of valuation related to mergers and acquisitions can be broadly categorized into three types, namely market based method, income based method, as well as asset based method. All these methods carry a significant degree of importance in the context of mergers and acquisitions. There are numerous elements, which ascertain whether a particular firm should be acquired or not.

The methods of valuation related to mergers and acquisitions can be broadly categorized into three types, namely market based method, income based method, as well as asset based method. All these methods carry a significant degree of importance in the context of mergers and acquisitions. There are numerous elements, which ascertain whether a particular firm should be acquired or not.

The financial steadiness of the firm, which is to be taken over is quite important to find out. In addition, the financial track record over the last few years and trends demonstrated in the macroeconomic ratio and indices require to be analyzed. Among the methods of valuation related to mergers and acquisitions, the market based method might be regarded as more appropriate, nevertheless, all the valuation methods are crucial, taking into account the condition that is prevalent at the time when a merger or acquisition is going to take place.

Methods of Valuation Related to Mergers and Acquisitions

The methods of valuation associated with mergers and acquisitions can be broadly classified into the following types:

1) Market Based Method

In valuation of mergers and acquisitions with the help of market based method, the different attributes of the firm which is going to be acquired are compared with the similar types of attributes of other firms in the market. These firms (not the firm in question) normally have a market value that has been set up earlier. Furthermore, some other factors are to be taken into consideration before the comparison of the different attributes is done. First of all, which elements need comparison are to be distinguished and secondly, which are the firms that are going to act as comparables. Public sector corporations involved in the same type of industry (of the target firm) can be chosen as comparables. Nevertheless, if the target firm is not registered with a stock exchange or is relatively small in its size than the public sector corporations, comparing it with the public sector corporations may not be useful. In these circumstances, public and private databases are there and these are basically commercial databases.

The other features that require to be compared are net earnings, gross revenue, and book value of assets. As soon as all the information have been gathered, a broad-based comparison is performed for obtaining the value of the target firm.

The market based method can be further categorized into the following types:

• Market multiple (or price-earnings ratio) of comparable firms for firms that are not listed
• Market capitalization of listed firms
  

  2) Income Based Method

  The income based method of valuation associated with mergers and acquisitions takes into account the net present value. The net present value of earnings that is going to be received in the future is taken into consideration through the implementation of a mathematical formula.

  The income based method can be further classified into the following types:

• Cost to create technique
• Free cash flow/discounted cash flow method
• Capitalized earnings technique
  

  3) Asset Based Method

  This method of valuation related to mergers and acquisitions is applied while the target firm is running at a loss. In this kind of a situation, the valuation of the assets of the firm at loss is estimated. Besides this procedure, the income based method and market based method can also be applied. Valuation received with the help of these procedures may render small values. Nevertheless, there is a probability that these methods would produce the true condition of the assets of the target firm.

  The asset based method can be further categorized into the following forms:

• Valuation of Intangible Assets
• Economic Book Value or Net Adjusted Asset Value
• Liquidation Value