Valuation for M&A : Building Value in Private Companies

by Frank C. Evans; David M. Bishop

• ISBN13: 9780471411017
• ISBN10: 0471411019
• Format: Hardcover
• Copyright: 2001-10-01
• Publisher: Wiley

Summary

The only resource available to help calculate investment value versus fair market valueWhether buying or selling, the question of "what's it worth?" is multifaceted. In an M&A setting, it is necessary to compute fair market value, but it is far more important to compute investment value-the value of the target company to a strategic buyer. This calculation varies with each prospective buyer, depending on synergies, benefits, and other competitive analyses that are seldom involved in business valuation. Valuation for M&A is the first book to focus on valuation for merger and acquisitions. This groundbreaking guide provides document request checklists, sample interview questions, a format for adjusting financial statements, a format for developing discount rates, a format for computation of net cash flow, and a valuation reconciliation form, all to help senior executives and M&A professionals better negotiate a successful deal.Frank C. Evans is a certified business appraiser (CBA), Accredited Senior Business Appraiser in Business Valuation (ASA), and CPA (accredited in business valuation) and David M. Bishop is a Master Certified Business Appraiser (MCBA), Accredited Senior Business Appraiser in Business Valuation (ASA), Fellow of the Institute of Business Appraisers (FIBA), and Business Valuator Accredited for Litigation (BVAL).

Author Biography

FRANK C. EVANS, a principal in Smith Evans Strimbu, Valuation Advisory Services, is a Certified Business Appraiser (CBA), an Accredited Senior Appraiser in Business Valuation (ASA), and a Certified Public Accountant/ Accreditedin Business Valuation (CPA). He works with middle market through Fortune 100 companies and has spoken at valuation seminars and conferences throughout North America and Europe. He is Editor of Business Appraisal Practice, published by the Institute of Business Appraisers, and has authored numerous articles. He is the recipient of several prestigious awards, including admission to the College of Fellows of the Institute of Business Appraisers. He can be contacted at [e-mail]<BR>

Table of Contents

Winning through Merger and Acquisition	1	(12)
Critical Values Shareholders Overlook	2	(2)
Stand-Alone Fair Market Value	4	(2)
Investment Value to Strategic Buyers	6	(2)
``Win-Win'' Benefits of Merger and Acquisition	8	(5)
Building Value in a Nonpublicly Traded Entity	13	(18)
Value and Value Creation	14	(1)
Public Company Value Creation Model	15	(2)
Nonpublic Company Value Creation Model	17	(4)
Measuring Value Creation	21	(3)
Analyzing Value Creation Strategies	24	(7)
Competitive Analysis	31	(12)
Linking Strategic Planning to Building Value	33	(2)
Assessing Specific Company Risk	35	(6)
Competitive Factors Frequently Encountered in Nonpublic Entities	41	(2)
Merger and Acquisition Market and Planning Process	43	(32)
Common Seller and Buyer Motivations	47	(1)
Why Mergers and Acquisitions Fail	48	(2)
Sales Strategy and Process	50	(12)
Acquisition Strategy and Process	62	(10)
Due Diligence Preparation	72	(3)
Measuring Synergies	75	(10)
Synergy Measurement Process	76	(4)
Key Variables in Assessing Synergies	80	(1)
Synergy and Advanced Planning	81	(4)
Valuation Approaches and Fundamentals	85	(20)
Business Valuation Approahces	85	(2)
Using the Invested Capital Model to Define the Investment Being Appraised	87	(1)
Why Net Cash Flow Measures Value Most Accurately	88	(3)
Frequent Need to Negotiate from Earnings Measures	91	(2)
Financial Statement Adjustments	93	(4)
Managing Investment Risk in Merger and Acquisition	97	(8)
Income Approach: Using Rates and Returns to Establish Value	105	(12)
Why Values for Merger and Acquisition Should Be Driven by the Income Approach	105	(2)
Two Methods within the Income Approach	107	(6)
Establishing Defendable Long-Term Growth Rates and Terminal Values	113	(4)
Cost of Capital Essentials for Accurate Valuations	117	(26)
Cost of Debt Capital	120	(1)
Cost of Preferred Stock	121	(1)
Cost of Common Stock	121	(1)
Fundamentals and Limitations of the Capital Asset Pricing Model	122	(3)
Modified Capital Asset Pricing Model	125	(1)
Buildup Method	126	(6)
Summary of Ibbotson Rate of Return Data	132	(4)
International Cost of Capital	136	(1)
How to Develop an Equity Cost for a Target Company	137	(6)
Weighted Average Cost of Capital	143	(12)
Iterative Weighted Average Cost of Capital Process	145	(5)
Shortcut Weighted Average Cost of Capital Formula	150	(2)
Common Errors in Computting Cost of Capital	152	(3)
Market Approach: Using Guideline Companies and Strategic Transcations	155	(16)
Merger and Acquisition Transactional Data Method	156	(4)
Guideline Public Company Method	160	(4)
Selection of Valuation Multiples	164	(1)
Market Multiples Commonly Used	165	(6)
Asset Approach	171	(12)
Book Value versus Market Value	173	(1)
Premises of Value	173	(1)
Use of the Asset Approach to Value Lack-of-Control Interests	174	(1)
Asset Approach Methodology	174	(6)
Treatment of Nonoperating Assets or Asset Surpluses or Shortages	180	(1)
Specific Steps in Computing Adjusted Book Value	181	(2)
Adjusting Value through Premiums and Discounts	183	(16)
Applicability of Premiums and Discounts	184	(1)
Application of Premiums and Discounts	185	(7)
Apply Discretion in the Size of the Adjustment	192	(1)
Control versus Lack of Control in Income-Driven Methods	193	(2)
Other Premiums and Discounts	195	(1)
Fair Market Value versus Investment Value	196	(3)
Reconciling Initial Value Estimates and Determining Value Conclusion	199	(18)
Essential Need for Broad Perspective	200	(3)
Income Approach Review	203	(5)
Market Approach Review	208	(2)
Asset Approach Review	210	(2)
Value Reconciliation and Conclusion	212	(1)
Candidly Assess Valuation Capabilities	213	(4)
Art of the Deal	217	(18)
Unique Negotiation Challenges	217	(2)
Deal Structure: Stock versus Assets	219	(7)
Terms of Sale: Cash versus Stock	226	(4)
Bridging the Gap	230	(3)
See the Deal from the Other Side	233	(2)
Measuring and Managing Value in High-Tech Start-Ups	235	(18)
Key Differences in High-Tech Start-Ups	236	(2)
Values Management Begins with Competitive Analysis	238	(4)
Quantifying the Value of a Start-Up Company	242	(7)
Need for Additional Risk Management Techniques	249	(3)
Reconciliation of Value	252	(1)
Merger and Acquisition Valuation Case Study	253	(38)
History and Competitive Conditions	254	(3)
Potential Buyers	257	(1)
General Economic Conditions	258	(1)
Specific Industry Conditions	259	(1)
Growth	260	(1)
Computation of the Stand-Alone Fair Market Value	260	(20)
Computation of Investment Value	280	(8)
Suggested Considerations to Case Conclusion	288	(3)
Index	291