Chapter 11

Valuation and Merger Strategy

A correct valuation analysis that accurately determines a target's price can be a key factor in determining if a deal will be a good one or a bad one. Certainly there are many companies that would not be a good acquisition at any price. A poor acquisition, such as Daimler's failed mega-deal with Chrysler, can absorb many corporate resources, which can have multiple adverse effects through the acquirer's organization. Firstly, the deal must be a good strategic fit. Obviously, we are not considering deals such as what private equity firms or firms such as Berkshire Hathaway would do, which have a very different purpose. Once the acquirer is confident that this is the case, then determining the correct price is the next step. It is important that the process not work the other way around. For example, consider cases where white knights acquire targets that they did not seek out. Often the acquisitions are presented with favorable financial terms but the targets may not be good strategic fits. This is why the research on the success of white knight acquisitions shows poor results.1

For many companies, however, there is a price that will enable a buyer to gain from the deal. When buyers pay more than that true value, they will lose unless they take some extraordinary steps to overcome paying too much for the target. In this chapter, we discuss some of the main valuation issues that affect merger strategy. The goal of this chapter is not to provide ...

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