Company Valuation in Mergers and Acquisitions: How Is Discounted Cash Flow Applied by Leading Practitioners?

Abstract

Based on interviews with major investment banks, we report how these leading practitioners apply discounted cash flow (DCF) techniques to value business enterprises. We find considerable alignment among the advisors and between practice and academic advice on major themes, including assessments of risk informed by data from financial markets and on the use of comparable company data. Our conversations reveal a complex set of judgments on valuation. While leading practitioners routinely use DCF methods in mergers and acquisitions (M&A) valuations, the application is often far from “routine”; it requires art and judgment in the face of inherently uncertain business forecasts such as those surrounding merger synergies. Our results serve as yet another reminder that analytic techniques such as DCF do not make decisions but only inform them.