VGR Investiments

Mergers and Acquisitions - M&A Valuation

The number as well as the average size of merger and acquisition deals is increasing in USA. During post liberalization, increase in domestic competition and competition against cheaper imports have made organizations merge themselves to reap the benefits of a large-sized company. The merger and acquisition valuation is the building block of a proposed deal. It is a technical concept that needs to be estimated carefully.

M&A valuation involves determining the maximum price that a buyer is willing to pay to buy the target company. From the seller's point of view, it means estimating the minimum price he wants to take against his business. If there are many buyers, then each one bids a purchase price based on his valuation. Finally, the seller will give the business to the highest bidder.

The use of different valuation techniques and principles has made valuation a subjective process. A conflict in the choice of technique is the main reason for the failure of many mergers. For instance, the asset value can be determined both at the market price and the cost price. Therefore, it is important that the merging parties should first discuss and agree upon the methods of valuation.

Calculating the swap ratio is at the core of the valuation process. It is the ratio at which the shares of the acquiring company will be exchanged with the shares of the acquired company.