Question

What’s the appropriate way to determine a takeover price? Should a freely negotiated purchase price always be used as the appropriate valuation of a target firm’s shares assuming the process was fair? Explain your answer.

Answer 1

Mostly takeovers are done using multiples, using comparable companies in an industry, but a variety of other methods and tools are available when assessing a target company. Here are just a few of them:

Discounted Cash Flow (DCF) - A key valuation apparatus in M&A, discounted cash flow examination decides an organization's present value as indicated by its assessed future cash flows. Forecasted free cash flows (net income + dep/amortization - capex - change in working capital) are discounted to a present value utilizing the organization's WACC.

Multiple Based Valuation - . It is very simple to aggregate data of the financial information and stock prices of publicly-held companies, and afterward change over this data into valuation products that depend on your own organisation.

Price Earnings Ratio (P/E Ratio) based on a multiple of the earnings of the target company.

Enterprise-Value-to-Sales Ratio (EV/Sales) based on multiple of the revenues basis on the price-to-sales ratio of other listed companies in the industry.

It often also depends on the Future prospects of the business. Does the objective organization have strong development prospects or major synergies are possible by acquisition, thus we can say that a freely negotiated price is often the best assessment of the value of the target company as it includes all the above factors into consideration and some other techniques like replacement cost, NAV, COC also into consideration.