Understanding M&A Valuation

Mergers and acquisitions (M&A) are essential strategies for companies seeking to grow and strengthen their market position. Understanding the complexities of M&A valuation methods and the challenges involved is vital for both parties to make informed decisions.

What are Mergers and Acquisitions?

M&As encompass various methods companies combine, such as purchases, asset acquisitions, takeovers, tender offers for stock, etc. While these terms are often used interchangeably, they each hold specific meanings. 

An acquisition occurs when one company purchases another and assumes ownership. This process can be friendly, with both parties in agreement, or it can be a hostile takeover, in which the target company does not wish to be acquired. In contrast, a merger occurs when two companies combine to form a new entity, operating as one instead of maintaining separate identities. This typically involves firms of similar size, commonly called a merger of equals.

M&A Valuations

The valuation of M&A involves assessing the worth of a company or its assets during a merger or acquisition. This step is crucial in the due diligence process. It helps both parties understand the value of the business being acquired or merged. In an M&A transaction, the seller is likely to assess the company at the highest price they can justify. In contrast, the buyer usually seeks to acquire it at the lowest feasible price. 

Analyzing comparable firms in the same industry is vital to objectively determining a company’s value. The appraisers usually refer to one of these M&A valuation approaches:

Challenges of M&A Valuations

Like any other, M&A valuations face particular challenges. One of the most common difficulties is the lack of data or comparables. It directly influences the ability to determine the company’s or its assets’ actual value.

Assessing the value of a public company is usually straightforward since you can reference the current market price of its shares. However, this market price might not accurately capture the company’s actual value due to influences like market sentiment, speculation, and liquidity. Therefore, it is essential to employ additional valuation methods, such as comparable company analysis or discounted cash flow analysis, to determine the company’s intrinsic value.

Valuing a private company can be difficult since there is no market price to reference. Instead, you have to depend on the information the company provides, as well as insights from third-party sources like industry reports, databases, and brokers. While you can apply the same valuation methods used for public companies, adjusting for factors such as limited marketability, liquidity, and transparency associated with private firms is necessary. For instance, you might need to include a discount for lack of marketability, which considers the challenges in selling private shares, or a premium for control, which acknowledges the power to influence the company’s strategic decisions.

RoyaltyRange’s CompID database

Find comparable companies for your M&A quickly and efficiently with our CompID database. It covers comprehensive information on private European companies and financials, and global public companies and their financials. The advanced search capabilities enable the effective identification of comparable data across various industries, countries, and financial information, thereby improving research and enhancing valuation processes.

The information in this article is for general informational purposes only and should not be construed as legal or tax advice. It is not a substitute for consulting with a qualified legal or tax professional.