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Valuation of a Firm in case of Mergers & Acqusitions B.V.Raghunandan, SVS College, Bantwal. Karnataka-India
Valuation of a Firm <ul><li>Most important aspect </li></ul><ul><li>Crucial for the success of M&A </li></ul><ul><li>Selec...
Valuation Approaches <ul><li>Discounted Cash Flow determines the value of the firm by ascertaining the present value of fu...
Merger as a Capital Budgeting Decision <ul><li>Capital Budgeting involves acquiring fixed or long-term assets </li></ul><u...
Steps in Evaluating M & A Decision <ul><li>Determine the Cost of Acquisition </li></ul><ul><li>Forecast the Incremental Ca...
A. Determining Cost of Acquisition <ul><li>Market Price of Equity Shares Allotted </li></ul><ul><li>(+) Payment to Prefere...
B. Forecasting Cash Flows of Future  <ul><li>Cash Flow </li></ul><ul><li>Free Cash Flow (FCF) </li></ul><ul><li>Operating ...
Cash Flow <ul><li>It is the net profit arrived at after removing non-cash items like depreciation and amortisation  of int...
Free Cash Flow <ul><li>It is a cash flow that is arrived at after providing for capital expenditure and the net working ca...
Calculation of Free Cash Flows (FCF) <ul><li>Profit after Tax  ………… </li></ul><ul><li>(+) Depreciation  ………… </li></ul><ul...
Operating Free Cash Flows (OFCF) <ul><li>It is the cash flow that takes into account only the operating income and operati...
Calculation of OFCF <ul><li>Profit after Tax  ………… </li></ul><ul><li>(+) Depreciation  ………… </li></ul><ul><li>(+) Amortisa...
Free Cash Flow to the Firm (FCFF) <ul><li>It takes into consideration all the cash items  including interest, items arisin...
Computation of FCFF <ul><li>Profit after Tax  ………… </li></ul><ul><li>(+) Depreciation  ………… </li></ul><ul><li>(+) Amortisa...
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M&A Valuation-B.V.Raghunandan

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Valuation of a firm in the context of Mergers & Acquisition of Firms

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Transcript of "M&A Valuation-B.V.Raghunandan"

  1. 1. Valuation of a Firm in case of Mergers & Acqusitions B.V.Raghunandan, SVS College, Bantwal. Karnataka-India
  2. 2. Valuation of a Firm <ul><li>Most important aspect </li></ul><ul><li>Crucial for the success of M&A </li></ul><ul><li>Selecting a suitable method of Valuation </li></ul><ul><li>Determining the Price payable </li></ul><ul><li>Mode of Payment </li></ul><ul><li>Forecasting future income is a vital element of any method of valuation </li></ul>
  3. 3. Valuation Approaches <ul><li>Discounted Cash Flow determines the value of the firm by ascertaining the present value of future cash flows </li></ul><ul><li>Comparable Firm determines the value of the firm at the value of a similar firm in the same industry </li></ul><ul><li>Adjusted Book Value estimates the value of the firm at the sum of market value of assets and liabilities as a going concern </li></ul><ul><li>Option Pricing Model regards the equity of a taken over company as an option and values it like an option </li></ul>
  4. 4. Merger as a Capital Budgeting Decision <ul><li>Capital Budgeting involves acquiring fixed or long-term assets </li></ul><ul><li>Discounted Cash Flow Approach is used determine the profitability of an asset or viability of a Project </li></ul><ul><li>M&A involves acquiring the target firm comprising a large number of assets and liabilities </li></ul><ul><li>It is a very long-term investment </li></ul><ul><li>Valuation of the target firm is done in the light of additional cash flows generated additionally by the acquisition </li></ul>
  5. 5. Steps in Evaluating M & A Decision <ul><li>Determine the Cost of Acquisition </li></ul><ul><li>Forecast the Incremental Cash flows for the future period </li></ul><ul><li>Calculate the cost of capital which can be used as the rate of discount </li></ul><ul><li>Obtain the present value of future free cash flows </li></ul><ul><li>Estimate the Terminal Value </li></ul><ul><li>Compute the present value of the terminal value by using the rate of discount </li></ul><ul><li>Add up the present value of future free cash flows and the present value of Terminal Value </li></ul>
  6. 6. A. Determining Cost of Acquisition <ul><li>Market Price of Equity Shares Allotted </li></ul><ul><li>(+) Payment to Preference Shareholders </li></ul><ul><li>(+) Payment to Debenture holders </li></ul><ul><li>(+) Payment of other Liabilities </li></ul><ul><li>(+) Unrecorded Liabilities </li></ul><ul><li>(+) Dissolution Expenses </li></ul><ul><li>(-) Sale of Assets </li></ul>
  7. 7. B. Forecasting Cash Flows of Future <ul><li>Cash Flow </li></ul><ul><li>Free Cash Flow (FCF) </li></ul><ul><li>Operating Free Cash Flow (OFCF) </li></ul><ul><li>Free Cash Flow to the Firm (FCFF) </li></ul><ul><li>Free Cash Flow to Equity (FCFE) </li></ul>
  8. 8. Cash Flow <ul><li>It is the net profit arrived at after removing non-cash items like depreciation and amortisation of intangible assets and expenses shown in the Balance Sheet </li></ul><ul><li>Cash Flow has become more reliable as manipulation becomes difficult with cash. As it is said, cash is a fact while profit is an opinion </li></ul><ul><li>It is calculated by adding back depreciation and amortisation of expenses to the Profit after Tax… </li></ul><ul><li>Profit after Tax ………… </li></ul><ul><li>(+) Depreciation ………… </li></ul><ul><li>(+) Amortisation of Expenses ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>Cash Flow ……… </li></ul><ul><li>-------------------- </li></ul>
  9. 9. Free Cash Flow <ul><li>It is a cash flow that is arrived at after providing for capital expenditure and the net working capital </li></ul><ul><li>It is a better measure since it considers the operating expenses and also the capital expenditure </li></ul><ul><li>It is also more realistic in that it takes care of the net working capital requirements </li></ul><ul><li>It is also a good measure because it shows the profitability that is relevant to both the equity shareholders and the lenders </li></ul>
  10. 10. Calculation of Free Cash Flows (FCF) <ul><li>Profit after Tax ………… </li></ul><ul><li>(+) Depreciation ………… </li></ul><ul><li>(+) Amortisation of Expenses ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>Cash Flow ………… </li></ul><ul><li>(-) Purchase of Fixed Assets ………… </li></ul><ul><li>(-) Increase in Net Working Capital ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>Free Cash Flow ………… </li></ul><ul><li>-------------------- </li></ul>
  11. 11. Operating Free Cash Flows (OFCF) <ul><li>It is the cash flow that takes into account only the operating income and operating expenses </li></ul><ul><li>Other items like interest, other income etc are ignored </li></ul><ul><li>It is a measure that shows the profitability of the main operation and is not affected by the investment activities and financing activities </li></ul><ul><li>This is used when only the manufacturing facilities are taken over through M&A </li></ul>
  12. 12. Calculation of OFCF <ul><li>Profit after Tax ………… </li></ul><ul><li>(+) Depreciation ………… </li></ul><ul><li>(+) Amortisation of Expenses ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>Cash Flow ………… </li></ul><ul><li>(-) Purchase of Fixed Assets ………… </li></ul><ul><li>(-) Increase in Net Working Capital ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>Free Cash Flow ………… </li></ul><ul><li>(+) Interest Paid ………… </li></ul><ul><li>(-) Interest Received ………… </li></ul><ul><li>(-) Other Income ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>Operating Free Cash Flow …………. </li></ul><ul><li>-------------------- </li></ul>
  13. 13. Free Cash Flow to the Firm (FCFF) <ul><li>It takes into consideration all the cash items including interest, items arising out of capital expenditure and also investment in marketable securities </li></ul><ul><li>The decision on M&A takes FCFF and its discounted values for the purpose of determining the value of the firm </li></ul><ul><li>There are many firms where investment, capital expenditure and capital receipts and other incomes are as regular as any other operating item </li></ul><ul><li>Thus, FCFF is the right cash flow for the purpose of valuation of the firm </li></ul>
  14. 14. Computation of FCFF <ul><li>Profit after Tax ………… </li></ul><ul><li>(+) Depreciation ………… </li></ul><ul><li>(+) Amortisation of Expenses ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>Cash Flow ………… </li></ul><ul><li>(-) Purchase of Fixed Assets ………… </li></ul><ul><li>(-) Increase in Net Working Capital ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>Free Cash Flow ………… </li></ul><ul><li>(+) Non-Operating Income …………. </li></ul><ul><li>(+) Decrease in Marketable Securities ………… </li></ul><ul><li>-------------------- </li></ul><ul><li>FCFF ………… </li></ul><ul><li>-------------------- </li></ul>
  15. 15. THANK YOU
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