Valuation for acquisition and mergers.docx

Valuation for acquisition and mergers.docx

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Valuationforacquisitionandmergers

Valuationforacquisitionandmergers

Chapter10

Valuationfor

acquisitionandmergers

Studyguide

Problemofovervaluation

Estimatethepotentialgrowthlevelofafirms’searning

Assesstheimpactofacquisitionuponriskprofileoftheacquirer

Usedifferentmodelsandprocedurestovaluedifferenttypesofacquisition

Type1***,type2***,type3**

Valuinghighgrowthstart-ups

11>.Overvaluationproblem

Whenacompanyacquiresanothercompany,italwayspaysaboveitscurrentmarketvalue.

PossiblereasonsforM&Anotenhancingshareholders’value

Agencytheory:

theovervaluationproblemisdeterminedbythedegreeoftheagencyproblemprevalentintheacquirerandtheabilityofthetarget’sshareholderstoextractthispremium.

Empiricalevidencesshowthereisnormallyafallinthepriceofthebidderandanincreaseinthepriceofthetargetduringanacquisition,indicatingatransferofvaluefromtheacquirertothetarget.

Miscalculationofthepotentialsynergiesortheoverestimationofabilityofacquiringfirm’smanagementtoimproveperformance.

NPVofM&A=Synergy-premium

Method1:

Method2:

2.Estimategrowthlevel

3waystoestimatethegrowthrateofearningsofacompany:

Historicalestimate

Lengthofestimationperiodhavetobedecidedsubjectively

Growthratemaybevolatile

Analystforecasts

Analystsregularlyproducedforecastsonthegrowthofacompany

Companyfundamentals:

growthrateisdeterminedbyROEandretentionrate

（P310Q&A）

3.ImpactofM&Aupon

riskprofileofacquirer

Type1acquisitiondoesnotdisturbtheacquirer’sfinancialorbusinessrisk

Type2acquisitionaffectstheacquirer’sfinancialriskbutnotitsbusinessrisk

Type3acquisitionaffectsboththeacquirer’sfinancialriskanditsbusinessrisk

Businessriskofcombinedentity

Assetbetaofcombinedfirmistheweightedaverageofthebetasofthetargetfirm,thepredatorfirmandthesynergy.

Leveragedequitybetaofcombinedfirm

CostofequityisgivenbyCAPM

WACCcanthenbederived

4.Type1acquisition

Methodstovaluetargetfirm:

Bookvalue-plusmodels

Marketrelativemodels

Cashflowmodels,includingEVA,MVA

Bookvalue-plusmodel

Basingonthebalancesheetasthestartingpointinthevaluationprocess.

Valuepershare

=netassetvalue/numberofordinaryshares

=（totaltangibleassets-shortandlong-termliabilities-preferenceshares）/numberofordinaryshares

Marketrelativemodels

P/Eratio

Marketvaluepershare=EPS×P/Eratio

AsuitableP/Eratioshouldbedecided,takingmarketexpectations,riskandstatus（quotedorunquotedcompany）intoconsideration（*p314Q&A）

EPScouldbehistoricalorprospective

Tobin’sQratio

marketvalueofafirm/totalassetvalueofthefirm

Q=1isacut-offpoint

Higher-Qfirmsusuallybuylow-Qfirms

Marketvalueofatargetcompany=M/Bratio×bookvalueofassets

Freecashflowmodels

Step1:

calculateFCF

Step2:

forecastFCFandterminalvalue

Step3:

calculateWACC

Step4:

discountFCFatWACCtoobtainvalueofthefirm

Step5:

calculateequityvaluebysubtractingvalueofdebt

*p316Q&A

Step1:

calculateFCFE

Step2:

forecastFCFEandterminalvalue

Step3:

calculatecostofequity

Step4:

discountFCFEatcostofequitytoobtainequityvalue

EVAapproach

EVA=NOPAT-WACC×Capitalemployed

=（ROIC-WACC）×Capitalemployed

NOPAT=EBIT×（1-T）

Capitalemployed=operatingcurrentassets-non-interestbearingcurrentliabilities+netfixedassets

ROIC=NOPAT/Capitalemployed

*capitalemployedatthebeginningoftheyear

Adjustmentsonintangibles,accountingdepreciationandamortization,etc.

P3174.5.1example

Valueofthefirm=valueofinvestedcapital+presentvalueofEVA

P3194.5.3example

MVAapproach

MVA=marketvalueofdebt+marketvalueofequity–（bookvalueofdebt+bookvalueofequity）

Showshowmuchthemanagementofcompanyhasaddedtothevalueofcapitalcapitalcontributedbycapitalproviders

Ifbookvalueandmarketvalueofdebtarethesame,thenitmeasuresthevalueaddedtoequity

MVA=PresentvalueofEVA

Sometimesexpressedasamarkettobookratio

Dividendvaluationbasis

Anequilibriumpriceforanyshareonastockmarketisthefutureexpectedstreamofincomediscountedatsuitablecostofcapital

Dividendgrowthmodel:

Valuationmethodscompared

2007-6-4（d）:

limitationofPEandCFbasedmethods

5.Type2acquisition

——usingAPV（p321example）

Step1:

calculateFCF

Step2:

forecastFCFandterminalvalue

Step3:

calculateunleveredcostofcapital

Step4:

discountFCFandterminalvalueatunleveredcostofcapital

Step5:

calculateinteresttaxshield

Step6:

discountinteresttaxshieldatpretaxcostofdebttoobtainPVofinteresttaxshield

Step7:

calculateAPV

6.Type3acquisition

Stepsforvaluingatyp