Intelligent M & A: Navigating the Mergers and Acquisitions Minefield, 2nd Edition

CHAPTER 8Valuation, Pricing, and Financing

Proper valuation is critical to the success of any merger or acquisition. Without it, a company might pay too much for the target or the target might accept a price that is lower than the value shareholders should accept. When two companies are deliberately combined as one through a process as significant as a merger or an acquisition, it is not surprising that those shareholders as well as the employees, clients, and others expect that there will be value generated from the deal's strategic and business objectives.

Each company and deal is different and there is no single best way to value a company – no “one size fits all.” In many ways, valuation in M&A is an art and not a science. Proper valuation comes with experience. Each valuation includes myriad assumptions which need to be made and small changes in any of these assumptions can have a large impact on the valuation.

Value versus Price

At the outset, in any discussion about the financials related to an M&A deal, the differences between valuation and price need to be highlighted:

• Value relates to the amount of money that the target company is worth to the bidder, typically taking into account the initial price paid plus any additional expenses (the costs of the deal as well as post-deal integration costs) less any synergies that will accrue to the new parent when the two companies are combined. This typically should be calculated taking into account the time value of money. This ...