23.4 DETERMINATION OF CONSIDERATION VALUE

Combination is a gainful strategy only when the value of the combined firm (VAB) is greater than the sum of the value of the two firms ( VA + VB) computed individually in the absence of the merger. This gain can be expressed in the form of an equation as follows:

However, the gain so derived has to be compared with the cost of M&A that is arrived at after deducting the value of the target firm from the price that the acquiring firm pays to the target firm. This means that the net gain from M&A accruing to the acquiring firm exists only when:

 

Combination is a gainful strategy only when the value of ...

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