Corporate Finance Theory and Practice, Third Edition

Chapter 43

TAKING CONTROL OF A COMPANY

A peek behind the scenes of investment banking

At any given time, a company can have several valuations, depending on the point of view of the buyer and the seller and their expectations of future profits and synergies. This variety sets the stage for negotiation but, needless to say, a transaction will take place only if common ground can be found – i.e. if the seller's minimum price does not exceed the buyer's maximum price.

The art of negotiation consists of allocating the value of the anticipated synergies between the buyer and the seller, and in finding an equilibrium between their respective positions, so that both come away with a good deal. The seller receives more than the value for the company on a standalone basis because he pockets part of the value of the synergies the buyer hopes to unlock. Similarly, the buyer pays out part of the value of the synergies, but has still not paid more than the company is worth to him.

Transactions can also result from erroneous valuations. A seller might think his company has reached a peak, for example, and the buyer that it still has growth potential. But generally, out-and-out deception is rarer than you might think. It's usually only in hindsight that we say we made a killing and that the party on the other side of the transaction was totally wrong!

In this chapter we will focus on the acquisition of one company by another. We will not consider industrial alliances, i.e. commercial or technology ...