Question

Why do we calculate terminal value when valuing a business if we did not use it for the team projects?

What would influence a Technology industry corporation's make or buy decision if it wanted to add a new IT consulting services division specialized in social media data mining?

Answer 1

Business valuation is always done on a going concern basis. Going concern means that the business will continue to generate profits or free cash flows for an infinite period of time. Therefore after forecasting the profits or free cash-flows for a fixed period of time, we consider them as infinite geometric production. The sum of this infinite geometric production is the terminal value.

Factors that would influence a Technology industry corporation's buy decision:

1. Synergy added to the business from the acquisition of the new IT consulting services division specialized in social media data mining. Synergy could be in terms of (a) entry into newer markets (b) decrease in costs (c) deferred tax benefits (d) high growth rate

2. The valuation at which the target company is being bought. It might be possible that the target company might be selling at a discount to its intrinsic value

3. New technology or R&D (research and development) benefits that the target company might be bringing. The target company might have very superior analytical capabilities which the acquirer company will take a lot of time to build organically