value of mergers and acquisitions

Value of Mergers and Acquisitions in Simple Words

Nowadays, M&A deals are the leading technique for the successful development of one’s business. Almost all successful companies use it today. In this article, we are going to analyze the concept of the value of mergers and acquisitions.

The role of M&A deal evaluation

In the context of the financial crisis and its consequences, it is becoming increasingly important for companies to look for possible ways to acquire additional competitive advantages. One of these ways can be a merger and acquisition (M&A) deal. In this regard, of considerable interest is the study of existing approaches to determining the value of the company – the object of the transaction, as well as possible options for changing it.

Undoubtedly, business valuation is perhaps the most important element in the rationale for choosing one or another acquisition object, which is formed in the process of systemic diagnostics of transaction options. In addition, business valuation tools are used in determining the additional value increase of the combined company, which is considered as the main characteristic of the effectiveness of the results of the M&A transaction and the process of integrating companies.

In the context of determining the methods for assessing the value of a company as a result of an M&A transaction, the specifics of assessing the process of combining companies are revealed, which includes financial analysis, the methods of assessment used, as well as the identification of the synergy effect. An integral part of the valuation of a company that is the target of a takeover is financial analysis. In general, financial analysis conducted for M&A purposes is a necessary part of the due diligence process.

What are the merger metrics?

In the M&A sector, the emphasis is often placed on evaluation metrics that give the most realistic picture of a deal. Deciding on the part of the initiating company to conduct a merger and acquisition transaction requires significant efforts from its management in assessing the profitability of the planned event. An M&A transaction can have a significant impact on the financial condition of the initiating company. Therefore, when planning such a transaction, it is necessary to conduct a valuation of the company object. An adequate valuation of the object of the transaction will allow in the future to evaluate not only the prospects for the development of the initiating company as part of the implementation of the business restructuring program but also the effectiveness of investment.

Among the advantages of the valuation of the company – the object of the acquisition, the following can be distinguished:

  • the valuation is based on the information of the company’s management reporting, which significantly reduces the risk of distortion of data on cash flows;
  • the valuation takes into account the future cash flows of the company, which will later be converted from receivables to real assets;
  • the use of discount rates allows you to take into account the risks arising from the formation of the company’s cash flows;
  • the value of the company – the object of the transaction is the most understandable indicator for persons who are not involved in the process of preparing the merger and acquisition transaction, but who have a direct influence on the decision to conduct it (owners).

So, returning to the methods that are most often used in valuation for mergers and acquisitions, it is worth highlighting the following: based on discounted cash flow or profit, asset replacement costs, asset value, market indicators. It is also becoming popular to use the method of real options to evaluate such transactions, as well as their effectiveness. An approach based on economic value added is also used.