- Overview of Mergers & Acquisitions
- M&A: Earnings Per Share & The “Bootsrap” Effect
- Industry Lifecycle Phase and M&A
- Pre-Offer Defense Takeover Mechanisms
- Post-Offer Defense Takeover Mechanisms
- Herfindahl-Hirschman Index (HHI)
- Valuing Target Companies
- Merger Gains to Shareholders & Post Merger Valuation
- Types of Restructuring

# Valuing Target Companies

There are several widely employed methods for valuing a potential M&A target; it is not uncommon for acquirers and investment banks to employ all of them when evaluating the attractiveness of a merger.

- Discounted Cash Flow (DCF) Analysis
- Comparable Company Analysis
- Comparable Transaction Analysis

## Discounted Cash Flow (DCF) Analysis

This is a derivative of the Gordon Growth approach to valuing a company, where an acquirer may discount free cash flows to the firm (FCFF) to value a potential target.

- FCFF is important because it incorporates contributions of all suppliers of capital - both debt and equity.
- DCF analysis attempts to determine the intrinsic value of the firm (i.e. the net present value of expected future cash flows).
- By breaking down the cash flows, DCF analysis allows for an analyst to estimate the potential value created by synergies.
- DCF analysis can be challenging because valuation relies on a number of estimates and assumptions that might not be fully known.
- Candidates should review the steps of a DCF valuation and practice them in preparation for the exam. This is also relevant to the Equity sessions.

## Comparable Company Analysis

The analyst will evaluate a target within the context of a group of relevant peer firms.

- The analyst must compile a list of comparable companies; the list may go beyond just firms in the target's industry, but include other companies of similar size and similar capital structure.
- The analyst must then select the appropriate equity and/or enterprise valuation metrics (note: enterprise metrics sum the value of debt and equity less cash and marketable securities).
- The analyst will then apply the selected valuation metrics to the target and its "comps."
- The analyst will then calculate the takeover premium (per share), which is the excess of the merger price per share over the pre-merger market price per share of equity divided by the pre-merger price per share.
- The analyst will then evaluate the takeover premium within the context of the comparable company valuations to determine a possible acquisition price.

## Comparable Transaction Analysis

This method allows for the direct estimation of a target's value by observing prices from recent acquisitions.

- The analyst identifies transactions that are comparable for the target in question. In this method, industry similar transactions are preferred.

- For example, if an analyst is looking at a potential software company merger, he/she would not review recent bank acquisition prices.

- Just like in a comparable company analysis, the analyst will identify valuation metrics.
- The analyst will then apply the valuation metrics to the target firm.

- For example, if an analyst is looking at a potential software company merger, he/she would not review recent bank acquisition prices.

This method is very attractive for evaluating M&A actions, but it can be very difficult to find truly comparable transactions and a number of adjustments may need to be made to the "comparable" transactions used in the analysis to make them relevant to the target in question.

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