Valuation for Mergers, Buyouts, and Restructuring, Second Edition

Chapter 1

A User's Guide

This book is organized in three parts. Part One contains the main methods used in valuation of companies and their business units; Part Two applies these methods to the valuation of mergers, acquisitions, and leveraged buyouts; and Part Three deals with recapitalization and restructuring analyses.

This chapter provides a guide to the use of the book. Readers interested in getting a detailed grounding on the different aspects of transaction valuation can follow the order of presentation of the book. Those using the book as a reference on valuation of particular transactions can read selected chapters as explained next.

1.1 VALUATION OF STAND-ALONE FIRMS AND BUSINESS UNITS

1.1.1 Free Cash-flow Valuation

The valuation of a stand-alone company or one of its business units is a common practical problem. Chapters 2 and 4 (Sections 4.1 to 4.3) provide the background necessary to perform this type of valuation. Chapter 2 introduces financial modeling and the valuation approach followed in the book, and it should be read first, even by those already familiar with the methods of free cash-flow valuation, since it provides the foundation upon which the rest of the book is based as well as a common terminology.

Chapter 2 presents a self-contained description of valuation based upon discounting the free cash flows generated by the enterprise. It shows how to compute free cash flows and the weighted average cost of capital (WACC) in order to obtain the value of enterprise, ...