Valuation for M&A: Building Value in Private Companies, 2nd Edition

by Chris M. Mellen; Frank C. Evans

• ISBN13: 9780470648810
• ISBN10: 0470648813
• Format: eBook
• Copyright: 2010-05-01
• Publisher: Wiley

Summary

Discover the tools necessary to determine what your company's value is, what drives its value, and how to enhance that value during an M&A transaction.The only book to focus on valuation specifically for merger and acquisitions, Valuation For M&A: Building Value in Private Companies, Second Edition lays out the steps for measuring and managing value creation in privately held businesses. Recognizes a company as an investment and explains how to manage that value to maximize shareholder returns, focusing on returns, risks, and capital invested Explains investment or strategic value versus fair market value and provides a document request checklist; sample interview questions; and formats for adjusting financial statements, developing discount rates, the computation of net cash flow; and a valuation reconciliation form Includes a comprehensive case study to illustrate concepts and calculations Now covers fair value accounting and the impact of SFAS Nos. 141, 142, and 157 and their IFRS counterparts, intangible asset valuation techniques, exit planning, international M&As, and venture backed/early stage companiesShowing corporate executives as well as M&A professionals and business appraisers how to value privately-held businesses for merger and acquisition purposes, this book helps investors, executives, and their advisors determine the optimum strategy to enhance both market value and strategic value to maximize return on investment.

Table of Contents

Preface

Dedication and Acknowledgments

Winning through Merger and Acquisition

Critical Values Shareholders Overlook

Stand-alone Fair Market Value

Investment Value to Strategic Buyers

"Win-Win" Benefits of Merger and Acquisition

Building Value and Measuring Return on Investment in a Private Company

Public Company Value Creation Model

Computing Private Company Value Creation and ROI

Analyzing Value Creation Strategies

Competitive Analysis

Linking Strategic Planning to Building Value

Assessing Specific-Company Risk

Competitive Factors Frequently Encountered in Nonpublic Entities

Financial Analysis

Conclusion

Merger and Acquisition Market and Planning Process

Common Seller and Buyer Motivations

Why Mergers and Acquisitions Fail

Sales Strategy and Process

Acquisition Strategy and Process

Due Diligence Preparation

Measuring Synergies

Synergy Measurement Process

Key Variables in Assessing Synergies

Synergy and Advance Planning

Exit Planning

Why Is Exit Planning So Difficult?

What Makes Planning for Your Private Company Investment Unique?

Why Should Exit Planning for Your Private Company Begin Now?

Exit Planning Process

Setting Exit Goals

Owner Readiness

Type of Exiting Owner

Exit Options

Range of Values

Execution of Exit Plan

Valuation Approaches and Fundamentals

Business Valuation Approaches

Using the Invested Capital Model to Define the Investment Being Appraised

Why Net Cash Flow Measures Value Most Accurately

Frequent Need to Negotiate from Earnings Measures

Financial Statement Adjustments

Managing Investment Risk in Merger and Acquisition

Conclusion

Income Approach: Using Rates and Returns to Establish Value

Why Values for Merger and Acquisition Should Be Driven by the Income Approach

Two Methods within the Income Approach

Three-Stage DCF Model

Establishing Defendable Long-term Growth Rates and Terminal Values

Cost of Capital Essentials for Accurate Valuations

Cost of Debt Capital

Cost of Preferred Stock

Cost of Common Stock

Fundamentals and Limitations of the Capital Asset Pricing Model

Modified Capital Asset Pricing Model

Build-up Model

Summary of Ibbotson Rate of Return Data

Private Cost of Capital

International Cost of Capital

How to Develop an Equity Cost for a Target Company

Weighted Average Cost of Capital

Iterative Weighted Average Cost of Capital Process

Shortcut Weighted Average Cost of Capital Formula

Common Errors in Computing Cost of Capital

Market Approach: Using Guideline Companies and Strategic Transactions

Merger and Acquisition Transactional Data Method

Guideline Public Company Method

Selection of Valuation Multiples

Market Multiples Commonly Used

Asset Approach

Book Value versus Market Value

Premises of Value

Use of the Asset Approach to Value Lack-of-Control Interests

Adjusted Book Value Method

Treatment of Nonoperating Assets or Asset Surpluses or Shortages

Specific Steps in Computing Adjusted Book Value

Adjusting Value through Premiums and Discounts

Applicability of Premiums and Discounts

Application and Derivation of Premiums and Discounts

Apply Discretion in the Size of the Adjustment

Control versus Lack of Control in Income-driven Methods

Fair Market Value versus Investment Value

Reconciling Initial Value Estimates and Determining Value Conclusion

Essential Need for Broad Perspective

Income Approach Review

Market Approach Review

Asset Approach Review

Value Reconciliation and Conclusion

Checks to Value

Candidly Assess Valuation Capabilities

Art of the Deal

Unique Negotiation Challenges

Deal Structure: Stock versus Assets

Terms of Sale: Cash versus Stock

Bridging the Gap

See the Deal from the Other Side

M&A and Financial Reporting

U.S. GAAP and IFRS

Relevant FASB and IFRS Statements

Reviews by the Audit Firm

ASC 820: Fair Value Measurements (SFAS 157)

ASC 805: Business Combinations (SFAS 141(R))

ASC 350: Goodwill and Other Intangible Assets (SFAS 142)

Incorporating ASC 805 (SFAS 141(R)) into the Due Diligence Process

References

Intangible Asset Valuation

Approaches to Valuing Intangible Assets

Key Components to Intangible Asset Valuation

Intangible Asset Valuation Methods

Conclusion

Measuring and Managing Value in High-Tech Start-ups

Why Appraisals of High-Tech Start-ups Are Essential

Key Differences in High-Tech Start-ups

Value Management Begins with Competitive Analysis

Stages of Development

Risk and Discount Rates

Start-ups and Traditional Valuation Methods

QED Survey of Valuation Methods Used by Venture Capitalists

A Probability-Weighted Scenario Method to Value Start-ups

Equity Allocation Methods

Conclusion

Cross-Border M&A

Strategic Buy-Side Considerations

Due Diligence

Sell-Side Considerations

Merger and Acquisition Valuation Case Study

History and Competitive Conditions

Potential Buyers

General Economic Conditions

Specific Industry Conditions

Growth

Computation of the Stand-alone Fair Market Value

Computation of Investment Value

Suggested Considerations to Case Conclusion

About the Authors

Index

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