The Essential CFO: A Corporate Finance Playbook

Chapter Eight

Evaluating Acquisition Candidates

THE CFO SHOULD WORK CLOSELY with the business sponsor and the deal team in evaluating the candidates for a merger or acquisition. Even if an investment bank or other external financial advisor is engaged, the CFO remains directly responsible for determining the assumptions and projections that will establish the target's valuation. The CFO should ensure objective assessments of the target and apply consistent methodologies in the financial analyses.

VALUATION METHODOLOGIES

CFOs should use a combination of methodologies to determine an estimated valuation for the target. The valuation techniques usually include discounted cash flows, comparable companies, precedent transactions, and a leveraged buyout analysis. If the target is a public company, the valuation will also include a premiums paid analysis.

Discounted Cash Flows

Discounted cash flow analyses are used to compute the net present value of the target, as well as internal rates of return using different assumed prices. CFOs prepare standalone projections for the target, and then overlay the projected net synergies, as well as the estimated costs of execution and integration.

The standalone projections can be based on models prepared by security analysts or other third parties, on internal forecasts provided by the target company (perhaps with adjustments by the acquirer, usually to make them less optimistic), or on estimates prepared by the acquirer using assumptions developed ...