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Determine a company's value, what drives it, and how to enhance value during a M&A


Valuation for M&A lays out the steps for measuring and managing value creation in non-publicly traded entities, and helps investors, executives, and their advisors determine the optimum strategy to enhance both market value and strategic value and maximize return on investment.


As a starting point in planning for a transaction, it is helpful to compute fair market value, which represents a "floor" value for the seller since it by definition represents a value agreed upon by any hypothetical willing and able buyer and seller. But for M&A, it is more important to compute investment value, which is the value of the target company to a strategic buyer (and which can vary with each prospective buyer).





Prepare for the sale and acquisition of a firm

Identify, quantify, and qualify the synergies that increase value to strategic buyers

Get access to new chapters on fairness opinions and professional service firms

Find a discussion of Roger Grabowski's writings on cost of capital, cross-border M&A, private cost of capital, intangible capital, and asset vs. stock transactions



Inside, all the necessary tools you need to build and measure private company value is just a page away!

Valuation for M&A: Building and Measuring Private Company Value

Preface xi





Dedication and Acknowledgments xv





PART I Introduction 1





Chapter 1 Winning through Mergers and Acquisitions 3





Critical Values Shareholders Overlook 5





Stand-Alone Fair Market Value 6





Investment Value to Strategic Buyers 8





Win-Win Benefits of Merger and Acquisition 10





Computation of Cavendish's Stand-Alone, Fair Market Value 11





Investment Value to Strategic Buyer 12





PART II Building Value 15





Chapter 2 Building Value and Measuring Return on Investment in a Private Company 17





Public Company Value Creation Model 17





Computing Private Company Value Creation and ROI 19





Analyzing Value Creation Strategies 35





Chapter 3 Market and Competitive Analysis 41





Linking Strategic Planning to Building Value 43





Assessing Specific Company Risk 48





Competitive Factors Frequently Encountered in Nonpublic Entities 53





Financial Analysis 54





Conclusion 59





Chapter 4 Merger and Acquisition Market and Planning Process 61





Common Seller and Buyer Motivations 64





Why Mergers and Acquisitions Fail 65





Sales Strategy and Process 67





Acquisition Strategy and Process 78





Due Diligence Preparation 86





Chapter 5 Measuring Synergies 91





Synergy Measurement Process 92





Key Variables in Assessing Synergies 95





Synergy and Advance Planning 96





PART III Measuring Value 99





Chapter 6 Valuation Approaches and Fundamentals 101





Business Valuation Approaches 101





Using the Invested Capital Model to Define the Investment Being Appraised 103





Why Net Cash Flow Measures Value Most Accurately 104





Frequent Need to Negotiate from Earnings Measures 106





Financial Statement Adjustments 109





Managing Investment Risk in Merger and Acquisition 112





Conclusion 117





Chapter 7 Income Approach: Using Expected Future Returns to Establish Value 119





Why Values for Merger and Acquisition Should Be Driven by the Income Approach 119





Two Methods within the Income Approach 121





Three-Stage DCF Model 128





Establishing Defendable Long-Term Growth Rates and Terminal Values 131





DCF Challenges and Applications 133





Chapter 8 Cost of Capital Essentials 135





Cost of Debt Capital 136





Cost of Preferred Stock 138





Cost of Common Stock 138





Fundamentals and Limitations of the Capital Asset Pricing Model 139





Modified Capital Asset Pricing Model 142





Build-Up Model 143





Summary of Rate of Return Data 151





Private Cost of Capital 153





International Cost of Capital 156





How to Develop an Equity Cost for a Target Company 157





Reconciling Discount Rates and P/E Multiples 159





Conclusion 161





Appendix 8A Using Specific Company Risk Strategically 162





Chapter 9 Weighted Average Cost of Capital 169





Iterative Weighted Average Cost of Capital Process 170





Shortcut Weighted Average Cost of Capital Formula 174





Common Errors in Computing Cost of Capital 176





Chapter 10 Market Approach: Using Guideline Public Companies and M&A Transactions 181





Transaction Multiple Method 182





Guideline Public Company Method 186





Selection of Valuation Multiples 190





Commonly Used Market Multiples 191





Chapter 11 Asset Approach 199





Book Value versus Market Value 200





Premises of Value 201





Use of the Asset Approach to Value Noncontrolling Interests 201





Adjusted Book Value Method 202





Specific Steps in Computing Adjusted Book Value 207





Chapter 12 Adjusting Value through Premiums and Discounts 209





Applicability of Premiums and Discounts 210





Application and Derivation of Premiums and Discounts 211





Apply Discretion in the Size of the Adjustment 213





Control versus Lack of Control in Income-Driven Methods 215





Fair Market Value versus Investment Value 215





Chapter 13 Reconciling Initial Value Estimates and Determining Value Conclusion 217





Essential Need for Broad Perspective 217





Income Approach Review 220





Market Approach Review 225





Asset Approach Review 226





Value Reconciliation and Conclusion 228





Checks to Value 231





Candidly Assess Valuation Capabilities 232





Valuation Scenarios - Platform for M&A 232





Appendix 13A Disciplined and Thorough Valuation Analysis Key to Avoiding Failed M&A Deals 235





Analysis of a Hypothetical Synergistic Deal 235





Establishing the Value of an Acquisition Target 236





Establishing Value for the Acquirer 238





Considerations of Other Impacts on Value 239





PART IV Specialty Issues 241





Chapter 14 Exit Planning 243





Why Is Exit Planning So Difficult? 244





What Makes Planning for Your Private Company Investment Unique? 247





Why Should Exit Planning for Your Private Company Begin Now? 249





Exit Planning Process 250





Step 1: Setting Exit Goals 252





Step 2: Owner Readiness 254





Step 3: Type of Exiting Owner 256





Step 4: Exit Options 258





Step 5: Range of Values 263





Step 6: Execution of Exit Plan 265





Chapter 15 Art of the Deal 269





Unique Negotiation Challenges 269





Deal Structure: Stock versus Assets 271





Asset Transaction 276





Terms of Sale: Cash versus Stock 279





Personal Goodwill 282





Bridging the Gap 283





See the Deal from the Other Side 286





Chapter 16 Fairness Opinions 289





Why Are Fairness Opinions Obtained? 291





The Use of Fairness Opinions by Private Companies 294





Parties Who Prepare Fairness Opinions 295





Components of a Fairness Opinion 297





What Fairness Opinions Are Not 301





Conclusion 302





Appendix 16A Sample Fairness Opinion Letter 303





Chapter 17 M&A and Financial Reporting 309





U.S. GAAP and IFRS 310





Relevant FASB and IFRS Statements 311





Reviews by the Audit Firm 312





ASC 820: Fair Value Measurements 313





ASC 805: Business Combinations 315





ASC 350: Goodwill and Other Intangible Assets 325





Incorporating ASC 805 into the Due Diligence Process 326





References 329





Chapter 18 Intangible Asset Valuation 331





Approaches to Valuing Intangible Assets 332





Key Components to Intangible Asset Valuation 334





Intangible Asset Valuation Methods 343





Conclusion 352





Chapter 19 Measuring and Managing Value in High-Tech Start-Ups 353





Why Appraisals of High-Tech Start-Ups Are Essential 353





Key Differences in High-Tech Start-Ups 355





Value Management Begins with Competitive Analysis 356





Stages of Development 358





Risk and Discount Rates 360





Start-Ups and Traditional Valuation Methods 361





QED Survey of Valuation Methods Used by Venture Capitalists 367





A Probability-Weighted Scenario Method to Value Start-Ups 372





Equity Allocation Methods 377





Conclusion 380





Chapter 20 Cross-Border M&A 381





Strategic Buy-Side Considerations 381





Due Diligence 390





Sell-Side Considerations 395





PART V Case Studies 397





Chapter 21 Merger and Acquisition Valuation Case Study - Distribution Company 399





History and Competitive Conditions 400





Potential Buyers 401





General Economic Conditions 402





Specific Industry Conditions 403





Growth 404





Computation of the Stand-Alone Fair Market Value 404





Risk and Value Drivers 409





Summary and Conclusion of Stand-Alone Fair Market Value 418





Computation of Investment Value 420





Suggested Considerations to Case Conclusion 427





Chapter 22 Merger and Acquisition Valuation Case Study -Professional Services Firm 429





Characteristics 429





Valuation Methods 433





Case Study Introduction 435





Potential Buyer 435





Historic Financial Performance 436





Future Expectations 439





Risk and Value Drivers 443





Discounted Cash Flow Method 445





Other Valuation Methods to Consider 445





Suggested Considerations to Case Conclusion 451





About the Authors 453





Glossary 455





Index 465