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

9 Pages Posted: 29 Oct 2015

See all articles by W. Todd Brotherson

W. Todd Brotherson

Southern Virginia University

Kenneth M. Eades

University of Virginia - Darden School of Business

Robert S. Harris

University of Virginia - Darden School of Business

Robert C. Higgins

University of Washington - Department of Finance and Business Economics

Date Written: 2014

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.

Suggested Citation

Brotherson, W. Todd and Eades, Kenneth M. and Harris, Robert S. and Higgins, Robert C., Company Valuation in Mergers and Acquisitions: How Is Discounted Cash Flow Applied by Leading Practitioners? (2014). Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 24, No. 2, pp. 43-51, 2014. Available at SSRN: https://ssrn.com/abstract=2681112

W. Todd Brotherson

Southern Virginia University ( email )

One University Hill Drive
Buena Vista, VA 24416
United States
(540) 261-8539 (Phone)
(540) 266-3859 (Fax)

Kenneth M. Eades

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4825 (Phone)
434-924-0714 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/eades.htm

Robert S. Harris (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4823 (Phone)
434-924-4859 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/harris.htm

Robert C. Higgins

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
306 Mackenzie Hall
Seattle, WA 98195
United States
206-543-4379 (Phone)
206-528-0340 (Fax)

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