Question

XYZ Corporation acquires the stock of TMP Corporation for $150 million dollars. As part of the transaction, XYZ does an appraisal and determines that the value of all of the assets of TMP is only $100 million.

Does this mean that XYZ paid too much to buy TMP? Explain your answer.

Answer 1

for acquiring any company there are multiple methods of valuation are avilable which are mainly

• Price-Earnings Ratio (P/E Ratio) ...
• Enterprise-Value-to-Sales Ratio (EV/Sales) ...
• Book Value. ...
• Liquidation Value. ...
• Market Value (of Securities) ...
• Replacement Cost Method.etc.

genrally it is assumed that for acquition if a company pays more then the net value of assets [ie. total value of assets - value of external liabilities ] acquiring company is paying more then the net worth of the company which is being acquired

however it always does not mean that An acquirer is paying too much for such acquition it depends on many factors which plays a major role in valuation for acquition

for example it depends on goodwill of another company , future synergies which is going to be created due to such acquition, distribution channel of the other company which is going to create synergy and other factors also

although there can be a optimum range for acquition which can be decide by way of valuation and negotiation .

in this case XYZ Corporation acquires the stock of TMP Corporation for $150 million dollars. As part of the transaction, XYZ does an appraisal and determines that the value of all of the assets of TMP is only $100 million

it is over valuation by the company however we cannot conclude that xyz is paying too much bcz it always depends on synergies created due to such acquition

rage can be start by  $100 million.