CASE11

METHODS OF VALUATION
FOR MERGERS AND
ACQUISITIONS
SYNDICATE 10:
Rani Fennesia 29116007
Lulu Nur Fitriani 29116367
Eugenia Andrea Dennisa 29116492
Rendy Mangunsong 29116550
 DISCOUNTED CASH FLOW (DCF)
The discounted-cash-flow approach in an M&A setting attempts to determine the
value of the company by computing the present value of Cash Flows over the
life of the company

REVIEW OF BASICS OF DCF

Free Cash Flow (FCF)
 FCF = NOPAT + DEPRECIATION - CAPEX - NWC

Terminal Value (TV)

 TV = FCF Steady State / (WACC- g )

Discount Rate
 WACC = Wd Kd (1-t) + We Ke
 THE M&A SETTING

First, we should recognize that there are two parties (sometimes more) in the
transaction: an acquirer (buyer or bidder) and a target firm (seller or acquired).
M & A are complex, involving many parties.
M&A nvolve many issues, coorporate governance, legal issue, regulatory approval.

Some important questions arise in applying our fundamental concept:

1.What are the potential sources of value form the combination?
2.What is the proper discount rate to use?
3.After determining the enterprise value, how is the value of the equity computed?
4.How does one incorporate the value of synergies in a DCF analysis?
Consideration for terminal value estimation
 Terminal value contributes the bulk of the total cash-flow value
 Estimating stedy-state free cash flow taht properly incorporates the
investment required to sustain steady-state growth expectation
 Terminal value estimate embeds assumptions about the long-term
profitability of target firm

Market multiples as alternative estimators of

terminal value
 How the market is currently valuing an entity based on certain benchmark.
 The benchmark should be something commonly valued and correlated with
market value

Transaction for compareable deals

 Analyst do comparing the offer price to target’s price before announcement,
like share price
 OTHER VALUATION METHODS
Book Value  May be appropriate for firms with no intangible assets,
commodity- type assets valued at market, and stable operations.

Liquidation Value  The sales of assets at a point in time. May be appropriate for
firms in financial distress, or its operating prospects are very cloudy

Replacement-Cost Value  Requirement from SEC to estimates replacement

values using certain rules for companies.

Market Value of Traded Securities  Method is used to value the equity of the
firm as Stock price x Outstanding shares. It can also be used to value the
enterprise (V) by adding the MV of Debt (D) as the price of bond x outstanding
bonds.
 SUMMARY COMMENTS
flawed methods to describe the past
The DCF method of valuation is superior
for company valuation in an M&A setting
“MEASURED WITH ERROR”
 Not tied to historical accounting
values. uncertainty about the future
 Focuses on cash flow, not profits.
 Separates the investment and Therefore:
financing effects into discrete  No valuation is right in any absolute
variables.
sense.
 Recognizes the time value of money.  use several scenarios / valuation
 Allows private information or special methods
insights to be incorporated explicitly.
 Allows expected operating strategy to  Avoid analysis paralysis
be incorporated explicitly.
 Embodies the operating costs and
benefits or intangible assets.  Adapt to diversity
THANK YOU