CHAPTER THIRTY-SIX
Mergers and Acquisitions
Acquisitions are made for a variety of reasons:
- To realize economies of scale and scope
- To access resources, such as technology, products, and distribution channels
- To build critical mass in growth industries
- To remove excess capacity and consolidate a mature industry
- To change the rules of competition as deregulation and technological change trigger convergence across industries
However, unless each transaction is assessed for the unique value creation potential of the combination, it is unlikely to generate competitive advantage for the acquiring company. Operationally, this amounts to managers asking what the key resources of the target company are in each transaction and how they will generate value when combined with the resources of the acquirer.
VALUATION
How do you value a targeted company?
In a merger, we have to value the targeted company. As a starting point in valuation, the key financial data, including historical financial statements, forecasted financial statements, and tax returns, must be accumulated and analyzed. The assumptions of the valuation must be clearly spelled out.
The valuation approaches can be profit or asset oriented. Adjusted earnings can be capitalized at an appropriate multiple. Future adjusted cash earnings can be discounted by the rate of return that may be earned. Assets can be valued at fair market value, for example, through appraisal. Comparative values of similar companies can serve as benchmarks. ...
