M&A: A Practical Guide to Doing the Deal, 2nd Edition

CHAPTER 17 Valuation Situations That Don’t Fit the Standard Models

In an ideal situation, the M&A target is a U.S. company with a history of improving sales and earnings. Most acquisition candidates don’t fit this model. This chapter provides pointers on evaluations that don’t meet the classroom example.

The ideal acquisition for most buyers is a U.S. company with a history of improving sales and earnings. We saw several examples in Chapters 13 and 16. For many buyers, the perfect candidate is either too expensive or not available in the desired industry. The wealth of potential deals that fall out of the textbook, cookie cutter mold require adjustment to the conventional approach. We start the review of these special cases with the conglomerate.

Sum-of-the-Parts

One of the problems with business valuation is the diversity of large corporations. Many are engaged in disparate product lines, which means the evaluation of one company turns into the study of a series of businesses. The painstaking valuation methodologies are thus repeated for each and every business. As a result, the proper analysis of a conglomerate involves two or three times the effort of assessing a one-industry operation.

Large corporations use a holding company to segment their businesses for legal, tax, and accounting purposes. Each business line is encapsulated in a subsidiary, a separate corporation that receives its permanent capital in the form of equity (and sometimes debt) from the mother company. ...