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VALUATION METHODS OFMERGERS & ACQUISITIONS

ByGroup 1.

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Value is

Cost vs. market value

Historical vs. Replacement

Differs depending on need of the person whois doing valuation- buyer, seller, employee,

banker, insurance company

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Valuation Process

Review and selection of valuation methods.

Understanding the issues which impact

valuation. Special situations and their impact on

valuation

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Why Valuation?

To purchase

To sell

To transact To take decisions

To report

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Valuation Methods

They can be broadly classified into three:

Cost Based

Income Based Market Based

Within these methods there are sub-methods

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Cost Based Methods

Book Value

Replacement Value

Liquidation Value

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Book Value Method

Historical cost evaluation

All assets are taken at historical book value.

Value of goodwill is added to the above figureto arrive at the valuation

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Book Value Method

CurrentCost Valuation

All assets are taken at current value and

summed to arrive at value This includes tangible assets, intangible

assets, stock, investments and receivables

VALUE= ASSETS - LIABILITIES

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Replacement Value Method

Cost of replacing existing business is taken as

the value of business

The replacement costs of its assets liabilities.

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Liquidation Value Method

Value, if a company is not going concern

Based on the value that will be derived if the

firms assets were liquidated.

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Income Based Methods

Earnings capitalization method or profit

earning capacity value method

Discounted cash flow method

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Earnings Capitalization

Method Companys Value is determined by

capitalizing its earning at a rate considered

suitable Assumption is that future earning potential of 

the company is the underlying value driver of 

the business

Suitable for fairly established business having

predictable revenue and cost models

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Discounted Cash Flows

Cash Flows statements are made

Net Present Value is helps in assessing the

value The cash flow from year 1 to year n is

calculated and is discounted to arrive at the

present value of future cash flows from year 1to year n

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Market Based Method

Also known as relative method

Assumption is that other firms in the industry

are comparable to the firm being valued Standard parameters are used like earnings,

profit, book value

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Valuation is based on

ManagementTeam

Historical Performance

Future Projections Project, product, USP

Industry Scenario

Country Scenario Market Opportunity, growth expected,

barriers to competition

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Valuation depends on

Nature of Competition

Amount of Money Required

Stage of Company (Pre-IPO, IPO) Strategic Requirements ( needs of the

company)

Demand/Supply Position Flavor of the Season

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Thank you.