RELEVANCE

VALUATION
CONCEPT
 OTHER RELEVANCE VALUATION
DUE DILIGENCE
 A process of validating the representations made by a seller, normally to an
investor. This process would require a thorough examination of records that
would be relevant in the realization of returns or the so-called advertised
benefits.
 Was started to be a formal exercise in the mid-1900.
 They have a Due diligence team
 R.A. 8799 or the Securities Regulation Code- Serves as the equivalent
regulation that protects investors in the country. And the law enumerates the
information that needs to be disclosed by companies and the frequency to
enable the commission to monitor the operations of the partnerships and
corporations in the Philippines
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 OTHER RELEVANCE VALUATION
Types of Due Diligence
 Corporate Due Diligence- If the due diligence exercise is to be conducted or
commissioned by a company or corporation that will invest in the business.
 Private Due Diligence- If the due diligence exercise is facilitated or
conducted by an individual or at least a few individual investors but is not yet
incorporated
 Government Due Diligence- If the due diligence is commissioned or
conducted by the government- This type of due diligence is for
the protection of the public or evaluation of the operations of the
company for the public interest

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 OTHER RELEVANCE VALUATION
Due Diligence According to Subjects
◦ Hard Due Diligence- When the due diligence focuses on the data and hard evidential
information.
Examples of hard diligence activities:
Review and audit of the financial statements
Validation of the projection for future performance
◦ Soft Due Diligence- Focuses on the internal affairs or the internal organization of the company
and its customers.
Examples of soft due diligence activities:
Competency Assessment
Quality Assurance on Customer Services
◦ Combined Due Diligence- When the focus of the due diligence exercise is to cover both
quantitative and qualitative areas of the company. Also known as Comprehensive due diligence

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 FACTORS TO BE CONSIDERED IN THE DUE
DILIGENCE PROCESS
 Market Capitalization- Provides an indication of how volatile the value of the company is in the market.
 Performance/Profitability Trend Analysis- This would add more integrity to the company on the realization of future
earnings. And may provide sufficient data for the projection.
 External Environment Analysis- Assessing the position of the company in the industry is also a good input to the due
diligence exercise.
 Management and Share Ownership- Assessment of the personalities involved in the governance and policymaking of
the company is also critical.
 Financial Statements- Serves as the best document to support the financial performance and financial position of the
company including its cash flows.
 Stock Price History- Investors should research both the short-term and long-term price movement of the stock and
whether the stock has been volatile or steady.
 Stock Dilution Possibilities- Investors should know how many shares outstanding the company has and how that
number relates to the competition.
 Market Expectations- Investors should find out what the consensus of market analysis is for earnings growth,
revenue, and profit estimates for the next two or three years.
 Long and Short-term Risks- The main objective of due diligence is essentially risk management.

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 MERGER AND AQUISITION
Mergers and Acquisition -a corporate strategy that allows a
company to combine its assets with another company or to acquire
another company.

Merger- two companies combine to form another company.

Acquisition- taking over or taking a part of a company.

 REASONS WHY COMPANIES ENTERED
INTO MERGERS AND AQUISITION
 Manage the cost of capital
 Expansion and growth
 Economies of scale
 Diversify for expanded market coverage
 Widen access to the industry
 Technological advancement
 Tax management strategies
 Legal strategies
 Control over supply chain
 MERGERS AND ACQUISITIONS
ACCORDING:
According to Form

disadvantageous position. “
 Absorption- when a company takes over another company, normally the latter in a more

 Consolidation- when two companies combined their assets and/or restructure their
debt profile.
According to Economic Perspective
 Horizontal- when two firms in the same industry combined.
 Vertical- when two companies merged from different stages of production or value
chain.
 Conglomerate- mergers, and acquisitions from completely unrelated industries.
Based on a Legal Perspective
 Short Form- when a parent purchases more interest from its subsidiary.
 Statutory- when a company combines with another where the company, the acquirer,
retains its name.
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 Subsidiary- the consolidation of the subsidiaries of a holding or parent company.
FIVE STAGES OF MERGERS AND ACQUISITION

 Pre-acquisition Review
 Investment Opportunity Scanning
 Valuation of Target Investment
 Negotiation
 Integration

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 CONSIDERATIONS TO MAXIMIZE
MERGERS AND ACQUISITION
 Determine the objective behind the acquisition and the benefits expected by both
acquire and target company from the deal.
 Understand the industry of both acquirer and target·
 Identify key operational advantages of acquirer and target company·
 Check with the acquirer if the takeover is friendly or hostile·
 Analyze the pre-merger operating and financial performance of the acquirer and
target company through key ratios such as return on equity, gross profit margins,
operating expenses % to sales, and working capital metrics.·
 Evaluate the tax position of both companies and determine if there are net
operating loss carryforwards and deferred tax assets in their books

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REASONS FOR FAILURE OF MERGERS AND
ACQUISITION
o Poor strategic Fit
o Poorly executed and ill-managed integration phase
o Inadequate Due Diligence
o Too Aggressive Projections and Estimates

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 MAJOR VALUATION METHODS USED IN M&S
o Discounted Cash Flow (DCF) method- The target’s value is calculated based
on its projected future cash flows with an appropriate discount rate.

o Comparable Company Analysis- Relative valuation metrics for public

companies are used to determine the value of the target.

o Comparable Transaction Analysis- Valuation metrics for past comparable

transactions in the industry are used to determine the value target.

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