Question

What values are important for mergers and acquisitions?

If you are considering acquiring a company, what kind of financial values, calculations, ratios, etc. would be considered important and why? Something basic, I'm not trying to get too in depth or complicated with these.

I appreciate the help!

Answer 1

Important values for mergers & acquisitions:

Following are some of the important values for mergers & acquisitions:

• Commitment: a commitment is usually a loyalty & it is a promise & expectation that has been created. Honouring the commitments can make a lot of difference. This is most important in case of merger or acquisition because if two companies merge or if one company is acquired by another company a company may promise another company that their corporate practices would continue or the rights of its employees would be safeguarded. The more the promises are fulfilled more the chances for success of the merger or acquisition.
• Cooperation: the main purpose of merger or acquisition is that a company that is better or good in something would acquire or merge with a company that is doing fair. These mergers or acquisitions can make the more complex tasks simpler which can be achieved only through proper cooperation & coordination between the two companies.
• Dedication: things before merger wont remain the same even after the merger or acquisition. Whatever happens it is necessary to stay on course & never give up. If we are dedicated & not emotionally abusive things would go on a right direction & can help to achieve the goals of merger or acquisition.
• Patience: this is a value which can improve productivity because it can create a better state of mind, a clear state of mind & also better for decision making.
• Respect: this is the most important value in merger & acquisition because two companies getting merged or acquired seem to be different in all aspects. Hence the individual values of both the companies must be given weight age. When we respect the other company’s values we are not only validating their dignity but also our own.

The valuation process would involve the following:

1. Historical Analysis: A detail analysis of past performance, including a determination of what drives performance. Several financial calculations need to be made, such as free cash flows, return on capital, etc. Ratio analysis and benchmarking are also used to identify trends that will carry forward into the future.
2. Performance Forecast: It will be necessary to estimate the future financial performance of the target company. This requires a clear understanding of what drives performance and what synergies are expected from the merger.
3. Estimate Cost of Capital: We need to determine a weighed average cost of capital for discounting the free cash flows.
4. Estimate Terminal Value: We will add a terminal value to our forecast period to account for the time beyond the forecast period.
5. Test & Interpret Results: Finally, once the valuation is calculated, the results should be tested against independent sources, revised, finalized, and presented to senior management.

Financial analysis:

historical evidence includes at least the last five years (preferably the last ten years) of financial statements for the Target Company. By analyzing past performance, we can develop a synopsis or conclusion about the Target Company's future expected performance. It is also important to gain an understanding of how the Target Company generates and invests its cash flows.

One obvious place to start is to assess how the merger will affect earnings. P / E Ratios (price to earnings per share) can be used as a rough indicator for assessing the impact on earnings. The higher the P / E Ratio of the acquiring firm compared to the target company, the greater the increase in Earnings per Share (EPS) to the acquiring firm. Dilution of EPS occurs when the P / E Ratio Paid for the target exceed the P / E Ratio of the acquiring company. The size of the target's earnings is also important; the larger the target's earnings are relative to the acquirer, the greater the increase to EPS for the combined company.

Most of our attention should be directed at drivers of value, such as return on capital. For example, free cash flow and economic value added are much more important drivers of value than EPS and P / E Ratios. Therefore, our financial analysis should determine how does the target company create value - does it come from equity, what capital structure is used, etc.? In order to answer these questions, we need to:

1. Calculate value drivers, such as free cash flow.
2. Analyze the results, looking for trends and comparing the results to other companies.
3. Looking back historically in order to ascertain a "normal" level of performance.
4. Analyzing the details to uncover how the Target Company creates value and noting what changes have taken place.