Acquisition Valuation
Aswath Damodaran

Aswath Damodaran

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Issues in Acquisition Valuation
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Acquisition valuations are complex, because the valuation often involved issues like synergy and control, which go beyond just valuing a target firm. It is important on the right sequence, including
• When should you consider synergy? • Where does the method of payment enter the process.

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Can synergy be valued, and if so, how? What is the value of control? How can you estimate the value?

Aswath Damodaran

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Steps involved in an Acquisition Valuation
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Step 1: Establish a motive for the acquisition Step 2: Choose a target Step 3: Value the target with the acquisition motive built in. Step 4: Decide on the mode of payment - cash or stock, and if cash, arrange for financing - debt or equity. Step 5: Choose the accounting method for the merger/acquisition purchase or pooling.

Aswath Damodaran

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Step 1: Motives behind acquisitions
(1) Simplest rationale is undervaluation, i.e., that firms that are undervalued by financial markets, relative to true value, will be targeted for acquisition by those who recognize this anomaly. (2) A more controversial reason is diversification, with the intent of stabilizing earnings and reducing risk. (3) Synergy refers to the potential additional value from combining two firms, either from operational or financial sources.
• • Operating Synergy can come from higher growth or lower costs Financial Synergy can come from tax savings, increased debt capacity or cash slack.

(4) Poorly managed firms are taken over and restructured by the new owners, who lay claim to the additional value. (5) Managerial self-interest and hubris are the primary, though unstated, reasons for many takeovers.

Aswath Damodaran

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Step 2: Choose a target firm for the acquisition
If motive is Target firm