Valuation of a target company

[Edwin]

How does the "valuation based on the joint-incremental net cashflow of the merger, attributed to the fact of the take-over alone" as the core reading says, relate to evaluating a target company?

 

[Edwin]

Sorted...

...actually, this has nothing to do with evaluating a target company. Rather it is part of the due diligence process.

I take the Risk Assessment section to be answering two questions;-

1) How much do these guys think their company is worth?

Beginning of the paragraph that says "The purchase of another firm..." to the end of the paragraph that says "This information will allow..."

2) What is the economic gain from the M/A?

Here the acquirer is simply valuing the benefit of synergies vs costs that will emerge from the M/A

Beginning of the paragraph that says ''Estimates of future income will involve..." to the end of the paragraph that says "Issues such as minority interests..."

The paragraph that says "Evaluating these aspects from the purchaser's point of view will..." is simply Restating that ;-

1) The answer to question 2 gives the maximum price that the purchaser is willing to pay
2) While the answer to question 1 is giving the minimum price that the vendor can accept. But an alternative answer to question 1 is to consider the market value of equity.
3) However when assessing the 'at what price?' versions of question 1 and 2, we need to adjust based on the possibility a third - party rival.


At-least this structure makes sense to me, and helps me best remember the work and move on to consider other parts of the work I am still not 'comfy' with.