Question

what do you feel is one of the important benefits and one concern of cash flow analysis citing your reason. give a real example. this is about merger & acquisition cash flow valuation basic.

Answer 1

The important benefit of the cah flow valuation analysis in case of merger and acquisition is the fact that a cash flow analysis helps you understand the business drivers of the target. The management is forced to think and rethink about the future, take view today about its performance in future, mull over what will lead to a good performance or a bad performance. A cash flow analysis tells the acquirer today itself, whether the acquisition will turn out to be accretive or not, and if yes, how sooner or later.

One cpncern about the cash flow analysis is the inability to make a realistic projection beyond two three years. Most of the M&A transaction fail to acheve the numbers shown in the boardroom presentation even though theyare prepared by the best in calss investment bankers.

Example from real life: America Online and Time Warner

• An example of prominent merger failure ever
• America Online acquired Time Warner in 2001.
• The dot-com bubble burst resulted in a significant reduction in the value of the company's AOL division.
• This was not prejeted in any cash flow anaysis byt he management. The real situation turned out to be far off from what was planned or thought about.

This is therefore an excellent example demonstrating one concern of cash flow analysis.