In the current business landscape, Mergers & Acquisitions (M&A) are considered as a strategy that increases efficiency and effectiveness in a market economy. However, M&A deals are complex transactions that require the transfer of ownership, assets, and liabilities between two or more companies. 

As per their own interests and motivations, companies get involved in M&A deals in which M&A valuation is a critical point that matters for a successful transaction. Because if you have the accurate numbers on the table, the M&A deal will appear as a win-win situation for the companies involved. 

This blog aims to guide you about everything you need to know on Mergers and Acquisitions Valuation, its methods, approaches and much more!

What are Mergers & Acquisitions?

The term ‘mergers and acquisitions’ refer to the consolidation of two or more companies or merger of their major assets by way of financial transactions between them.  

A company may purchase and take over another company outright, merge with it to create a new company, acquire some or all its major assets, make a tender offer for its stock, or stage a hostile takeover. All these activities are known as Mergers & Acquisitions.

Types of Mergers & Acquisitions 

Mergers and Acquisitions is an umbrella term that refers to typ es of company consolidations, restructurings, regrouping, tender offers, purchase of assets, financial transactions, etc. 

However, mergers are quite different from acquisitions, still sometimes people use these terms independently and unchangeably. To clarify the different types of M&A and how they differ from each other, here are the most common types of M&A deals:

1. Vertical Merger 

In vertical mergers, the entities involve their operations in different stages of production or industries. The entities merge to match the demand and supply. These types of mergers reduce the transaction charges, help the companies to obtain autonomy, and become self-reliant. 

For example, when a car manufacturing company merges with a tyre or leather manufacturing company, it is considered a vertical merger.

2. Horizontal Merger

In Horizontal mergers, the companies consolidate and have the same kind of business at the same level in the market. The horizontal merger benefits economies of scale and economies of scope. 

While it can adversely contribute to the creation of a monopoly in the market by the companies involved. The Competition Commission of India (CCI) proactively monitors horizontal mergers to block a monopoly from being established in the market.  

3. Triangular Merger

Triangular Merger happens when a target company and the subsidiary of the acquiring company get merged because of regulatory and tax-related reasons. A triangular merger is further subdivided into a forward merger and a backward merger. 

When a target entity gets merged with the subsidiary of the acquirer entity and its subsidiary continues to exist after the merger, it is known as a forward merger. 

When the subsidiary of the acquirer entity gets merged with the target entity and the target entity continues to exist after the merger, it is known as a backward merger. 

4. Conglomerate Merger

In conglomerate mergers, the companies are involved in two different industries. The primary goal of this merger is to expand their debt-receiving capacity, make efficient use of financial resources, and raise the prices of their issued shares. 

For example, a jeweler company acquiring a petroleum company, an automobile company acquiring a textile company, etc.

5. Congeneric Merger (Circular Merger)

Congeneric mergers, or circular mergers, occur when companies from similar or related industries come together. Even if they do not share the exact customers or suppliers, they attempt to expand the customer base by utilizing each other’s distribution channels. 

6. Cash Merger (Cash-out Merger)

Cash Merger is when a company gets merged with another, and the shareholders of the merging company are provided with cash as an alternative to the shares. A cash merger provides an easy way for the shareholders who are willing to leave a particular company by selling their shares. 

7. Tender Offer

A tender offer is a proposal to purchase some or all of a shareholder’s stock in a corporation. One company offers to purchase another firm’s stock at a special price, typically below the market rate.  

A company proposes to buy another company’s shares at a lower price than the market value. It might also propose a tender offer to its current shareholders to repurchase some of its own shares.

8. Acquisitions of Assets

Asset acquisition involves one company buying the assets of another company. The company that is buying it needs to get approval from its shareholders. This is usually a side effect of liquidation or bankruptcy deals when a company must sell its assets to settle debts. 

9. Management Acquisitions

Management acquisition, also known as, management-led buyout, is when a company’s executives purchase a controlling stake in another company, taking it private. However, the transaction must be approved by the shareholders. 

Valuation in Mergers & Acquisitions

The purpose of valuing a business in mergers and acquisitions is to determine its financial worth by examining various factors related to its business activities. Even if two companies work in the same industry and have similar market sizes, their valuations can differ based on other aspects of their business. 

If buyers can easily create a similar business without high startup costs, they may value the seller’s company lower. They might question why they should pay a lot for an existing business when they can build one themselves. In such cases, the seller has limited negotiating power. 

On the other hand, if the seller’s business is hard or costly to duplicate and has great growth opportunities, it becomes a seller’s advantage in M&A. Thus, both companies need clear numbers to support their negotiations.  

The Merger & Acquisition valuation helps by valuing several criteria to provide an unbiased valuation. With the support of a certified valuer, buyers and sellers place offers and negotiate effectively with objective information for negotiations. 

Why do you require M&A valuation?

M&A Valuation is key to a successful transaction because it reveals the financial aspects of the deal. Here are the top 3 reasons to go for M&A valuation:

1. Decision-Making 

M&A valuation helps to execute better decisions and reduces the risk of paying higher or selling for a lower value by coming to a fair price for the transaction. 

2. Asset Evaluation

M&A valuation evaluates a company’s assets, including physical and non-physical ones like brand reputation and intellectual property to identify untapped prospects that can majorly affect the overall value of the deal. 

3. Risk Control 

M&A valuation shows the potential risks of the target company like potential liabilities, legal issues, or ongoing lawsuits, and helps companies to negotiate suitable protections or adjust the agreement as needed. 

Methods of M&A Valuation 

Here are the popular methods of M&A Valuation: 

1. Price-to-Earnings Ratio (P/E Ratio)

The P/E Ratio valuation method helps an acquiring company to get the earnings of the target company from multiple sources. This way, the acquiring company can assess its offer to make for buying the target company.

2. Enterprise-Value-to-Sales Ratio (EV/Sales)

The EV/Sales ratio valuation method provides the estimated offer as a multiple of the revenues to the acquiring company with consideration for the P/E ratio of other companies in the industry.

3. Discounted Cash Flow (DCF) 

The DCF valuation method evaluates a company’s current value, according to its estimated future cash flows that are discounted to a present value using the company’s weighted average cost of capital (WACC).

M&A Valuation Approaches

M&A Valuation consists of three primary approaches including the asset-based approach, the income approach, and the market approach to value the businesses. M&A valuers use a single approach or combine all of them to arrive at the appropriate value.

1. Asset-Based Approach

The asset-based approach values the company’s net asset value by subtracting all liabilities from total assets. This approach helps companies to find a real value of assets and makes the acquiring companies aware of not paying extra.

2. Income Approach

The income approach of valuation provides the value of a potential acquisition that surpasses the future value of its revenue sources, being adjusted for investment risk and the time value of money. 

3. Market Approach

The market approach of valuation evaluates the businesses that are similar in the market and provides a value for a minority stake. The market approach valuer uses the methods to change the minority interest value to a control interest value and the multiplier connects the total purchase prices to the book value or a known revenue system. 

Factors Affecting M&A Valuation

1. Collaborative and Strategic Fit

In mergers and acquisitions, the collaboration of the two companies shows us synergies among them. How they can benefit each other by collaborating. You get an estimation of lower expenses, higher profits, and increased efficiency by considering if the company is a strategic fit for your business or not. 

2. Regulatory and Legal Issues

If mergers and acquisitions influence market competition to larger levels, it will also be impacted by the regulatory and legal issues of the deals. Usually, the regulatory and antitrust authorities are concerned about balancing the market by delaying or blocking the deal before finalization. 

When it comes to M&A valuers, they need to understand the probability of getting approval from authority and regulations that may affect the deal in the future profits and business operations of M&A deal companies. 

3. Market and Economic Conditions

M&A valuation is majorly impacted from the happenings in the market and economy. Recession time of the market can change the estimations of the M&A valuation after the deal.

4. Tax Considerations 

The M&A valuation also needs to consider the tax implications that can affect the deal’s final expense or savings. Understanding the complex tax structure and its regulations is important for maximizing tax advantages. 

5. Technology and Intellectual Property

M&A valuation is also affected by valuing technology and intellectual property because they are intangible assets and depend on the market and regulations of the future. That’s why you need to be accurate in setting their exact value.

6. Debt and Financing Structures 

M&A valuation is impacted by its debt and financing structure which mainly determines the balance sheet and the cost of capital. M&A valuers consider the high debt levels, their sustainability and restrictions. 

7. Buyer Type

Which type of buyer is making merger and acquisition also affects M&A valuation. For example, a strategic buyer will consider high value for a target company due to its long-term benefits, while a financial buyer will primarily focus on financial benefits, involving the importance of approach for the M&A valuation. 

Challenges in M&A Valuation

M&A valuation is a complicated process and has several challenges. M&A valuers and M&A dealmakers should consider these key challenges: 

1. Relevance and Quality of Data 

Target company needs to get complete authentic data on finance and operations, and this is a challenging process. M&A valuers must be very careful in utilizing the data to avoid biased valuations.

2. Synergy Evaluation 

Synergy evaluation plays a key role for the acquiring and target companies. The evaluation has its challenges and requires a detailed comprehension of industry dynamics from the M&A valuers. 

3. Future Forecasts 

M&A valuations include challenges of predicting the target company’s potential performance, growth patterns, and market circumstances. It’s important to do thorough research and evaluate multiple scenarios to minimize the biases in M&A valuation. 

4. Experience and Due Diligence 

M&A valuation analyzes professional experience and provides comprehensive due diligence. It also involves industry experts to ensure an accurate valuation of the target and its market position. 

Why Choose My Valuation for M&A Valuation? 

My Valuation is one of India’s leading mergers and acquisitions valuation firms, having experience valuing small to large businesses in mergers and acquisitions deals. 

In the current market landscape, mergers and acquisitions become an integral part of business strategy as businesses continue to compete and grow in the industry. However, the M&A procedure is hectic, long, and complex in which the M&A deal’s valuation plays a crucial role. 

To make the M&A valuation easier, choose our qualified M&A valuation services that provide you with reliable results, potential risks, and market uncertainties in industry.  

Contact us today to make your M&A process streamlined and simplified with accurate M&A valuation. 

Final Thought

Mergers and acquisitions will continue to happen for companies looking for growth and leadership in the market. Before making any considerations, an M&A deal needs to be evaluated by a professional M&A valuer or M&A valuation firm to understand factors beyond the purchase price.  

At My Valuation, we are an IBBI-registered valuation firm, providing comprehensive business valuation services to various businesses across industries. From startup valuation, and ESOP valuation to mergers & acquisitions (M&A) valuation, our expert valuer team at My Valuation ensures valuations are provided with accurate values and streamlined structures. 

Get in touch with us today! 

FAQs

1. What is M&A valuation?

M&A valuation is the process of evaluating a company or its assets during a merger and acquisition. The M&A valuation process analyzes financial data, market trends, and possible benefits from merging companies to estimate a fair buying or selling price. 

2. How do you evaluate potential synergies in M&A valuation?

M&A valuation evaluates potential synergies by how two companies together can be worth more than they are separately. The evaluation measures savings on costs, chances to increase revenue, and benefits in the market that come from the M&A deal.

3. How M&A valuation helps in negotiating deal terms?

M&A valuation provides a reliable basis for negotiating deal terms by defining the fair market value of the target company. It helps buyers not to overpay and ensures sellers get a fair price. M&A Valuation also helps in discussions about risk sharing and possible changes to the deal structure.

4. How long does the M&A valuation process typically take?

The time duration of the M&A valuation process can change based on the complexity of the deal, quality of data, and estimated valuation parts. The M&A valuation process may take from a few weeks to a couple of months, depending on the due diligence, analysis, and negotiation phases. 

5. Can M&A valuation uncover hidden risks in a target company?

Yes, M&A valuation can accurately identify potential risks linked to the target company, like legal issues, potential debts, or ongoing lawsuits. A detailed M&A valuation helps reveal these risks, which impact the decision-making and negotiation stages.