mna valuation Flashcards
Why can’t you just take the pre-merger announcement value of the acquired firm as its standalone value?
A:
If the target is “in play” (e.g., rumors about acquisition), its market value may already include an acquisition premium.
Pre-merger valuation should be cross-checked with fundamental valuation methods (DCF, multiples) to ensure accuracy.
A bid on the target might indicate the pre-announcement market value is less than its true standalone value, suggesting the target is fundamentally undervalued.
The standalone value should not incorporate synergies; it reflects the value of the firm “as-is.”
Why is “no go” not necessarily the same as maintaining the “status quo” in a merger scenario?
If a competitor acquires the target, it could weaken your market position.
Not pursuing the merger may result in a worse position than the status quo.
A “no go” decision can lead to strategic disadvantages if the target aligns with a competitor.
Q: What are the two approaches to quantifying synergies in M&A?
Value the Combination:
Value both firms independently (stand-alone valuations) and add them → gives the value of the combination without synergies.
Value the combined entity with synergies → the difference between the two represents the synergies.
Incremental Logic:
Use an incremental approach to directly quantify synergies.
Q: What are the two practical approaches to determining beta after a merger?
A:
Weighted Average Beta:
Use the weighted average of the buyer’s and target’s beta:
Industry Beta:
If the merger creates an entirely new company, use an industry beta derived from comparable firms, incorporating assumptions about expected capital structure.
what are the 3 problems that arise when computing the value of the synergies using the some of the market cap change
1) it assumes that the price of the company would not have moved during the period. wich is false since company are expose to market risk
2) it assumes their was no leakage of information before
3) it assumes that the probability of the deal passing trough is 100% (mitigate regulatory approval risk, target refusing offer risk, buyers pulling out )
how can you account for those problem
1)
2) taking the price before the leakage/increase in volume
3)
Q: What are the implications for the target in an all-equity deal compared to an all-cash deal?
A:
In an all-equity deal, target shareholders:
Are exposed to the risk of fluctuations in the bidder’s valuation.
Are exposed to the value of synergies.
Act as “partners” in the new venture rather than just “sellers.”
Share transaction costs, which reduces the value of the joint entity (similar to a reduction in synergies).
How does the acquisition premium differ between all-cash and all-equity deals?
is the acquisition premium meaningfull
In an all-cash deal, the acquisition premium directly represents the deal’s NPV for the target shareholders, assuming the deal proceeds as announced. so yes it is meaningfull
- In an all-equity deal, the deal’s NPV depends on the value of the new combined entity (NewCo) and the synergies shared between the bidder and target shareholders. The value of the NewCo ultimately determines the NPV for the target shareholders. so not meaningfully alone
Q: What are the risks and considerations for shareholders in a deal involving equity as consideration?
Risks:
For target shareholders: Risk of a drop in the buyer’s share price between the announcement and completion of the deal.
For buyer shareholders: Risk of the offer value increasing if the buyer’s share price rises during that time.
How to address it:
Use a fixed value offer, where the exchange ratio adjusts to ensure target shareholders receive a fixed value at deal completion.
For a fixed shares offer, include clauses to limit price exposure for target shareholders.
