Valuation in Merger Process

Journal of Teaching and Education, 05(01):361–370 (2016)

9 Pages Posted: 24 Jun 2016

See all articles by Sangeeta Pandit

Sangeeta Pandit

University of Mumbai

Rajesh Kumar Srivastava

Somiya Institute of Management

Date Written: June 24, 2016

Abstract

In any merger process, valuation of the deal is an important aspect. The M & A activity must make business sense and also be financially prudent. Valuation methods bring discipline and rigour in the negotiation process. A popular valuation method is the Comparable Companies Method. The Logic of the approach is that similar companies must fetch similar prices. Companies similar in aspects like growth rates and products are considered. Discounted Cash Flow Method is another method followed. It involves projections of future cash flows. Making Projections is becoming difficult due to increasing political and economic uncertainties. Due to systematic relationships being established over the various parameters, formulae have evolved and are used in valuation. For a merger to bring in synergies, in the long run, the valuation must be fair. It is not a precise science of spreadsheets and formulae but an art involving ethics, forecasting techniques and creating a positive environment. Valuation needs more of forecasting ability. For better projections, M & A teams need people with competency in economics and human resource management. M & A activities have to be undertaken with a specific purpose. It cannot be due to some ego issue or idea without deliberation of a top executive. M & A is considered as a financial expert job but it is more a job of market analysts, of economists and of psychologists. Winning over trust and commitment of target company's employees is the main driver for post-merger synergy.Pre-merger, there is a flurry of activities. Post merger operations go on as per the culture of the Acquiring Company. This is not desirable. A team has to be constituted to oversee harmonious merging of the entities. The purpose of this study is to understand the intricacies of the various Valuation methods followed and to understand their applicability. About 10 executives of companies involved in M & A activities were interviewed. Secondary Data available on public domain has been analyzed.Excel tools were used. Ratios, trend analysis and merger activities studied. Business restructuring is increasingly carried out by M & A activity. Only a fair valuation and prudent post merger management can lead to long-term synergies.

Keywords: Valuation, Synergy, Ratios, Cash flows, Projections

JEL Classification: G34

Suggested Citation

Pandit, Sangeeta and Srivastava, Rajesh Kumar, Valuation in Merger Process (June 24, 2016). Journal of Teaching and Education, 05(01):361–370 (2016), Available at SSRN: https://ssrn.com/abstract=2800105

Sangeeta Pandit (Contact Author)

University of Mumbai ( email )

Mahatma Gandhi Road
Mumbai, 400032
India

Rajesh Kumar Srivastava

Somiya Institute of Management ( email )

Mumbai
India

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