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The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions by H. Kent Baker, Halil Kiymaz

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CHAPTER 8

Standard Valuation Methods for M&As

PABLO FERNANDEZ

Professor of Finance, IESE Business School, University of Navarra

INTRODUCTION

Understanding the mechanisms of company valuation is indispensable for anyone involved in corporate finance, especially those dealing with capital restructuring. Generally speaking, a company's value differs among buyers and it may also differ for the buyer and the seller. Value should not be confused with price, which is the amount agreed between a buyer and a seller. Differing values for a specific company may occur for many reasons. For example, a large, technologically advanced foreign company wants to buy a well-known national company to gain entry into the local market, using the reputation of the local brand. In this case, the foreign buyer may only value the brand but not the physical assets (e.g., plant and machinery) because the buyer already has more advanced assets. However, the seller may give a high value to its material resources because such resources enable the firm to continue producing. From the buyer's viewpoint, the basic aim is to determine the maximum value it is willing to pay for the company. From the seller's viewpoint, the aim is to ascertain the minimum value it is willing to accept. The buyer and seller take these figures into a negotiation and often agree on a price somewhere between the two extremes. Potential bidders may assign different values to a company due to economies of scale, economies of scope, or ...

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