2024-09-16 | Helicopter View on the Main Valuation Techniques in M&A

Valuation in M&A

The process of determining the worth of a business or asset in Mergers and Acquisitions.

Value vs. Price in M&A

Value is subjective and can vary, while price is the amount someone is willing to pay.

Key Factors in Valuation

Industry, growth potential, market trends, and risks all affect company valuation.

Example: Tech vs. Manufacturing

Even with similar revenue, companies in tech may be valued higher due to growth potential.

Purpose of Valuation

To ensure buyers and sellers agree on a fair price for a company in an M&A deal.

Critical Relationship

Understanding the difference between value (subjective) and price (objective) is key to M&A.

Discounted Cash Flow (DCF)

Valuation method that determines the present value of projected free cash flows.

DCF Time Horizon

Considers both long-term and short-term performance of a company.

Risk and DCF

Risk is captured in the discount rate, reflecting cash flow and capital structure uncertainties.

DCF Key Output

Presents the intrinsic value of a company based on its ability to generate future cash flows.

Importance of DCF in M&A

Used to estimate the value of a company as part of the decision-making process in acquisitions.

Trading Multiples

Valuation method comparing a company's market value to financial indicators like earnings or revenue.

Common Multiples

Price-to-Earnings (P/E) and Enterprise Value-to-EBITDA (EV/EBITDA) are commonly used trading multiples.

Purpose of Trading Multiples

Helps assess whether a company is overvalued or undervalued compared to peers.

Public Market Valuation

Trading multiples are derived from public market data, reflecting how companies are valued by investors.

Historical vs. Prospective Multiples

Multiples can be applied using both past (historical) and future (prospective) performance metrics.

Exclusion of Control Premium

Trading multiples do not account for a control premium, which can affect acquisition pricing.

Enterprise Value (EV)

The total value of a company, including debt, equity, and cash or assets.

Equity Value

The value of a company that belongs to its shareholders, calculated as EV minus net debt.

Net Financial Debt

Total debt minus cash and cash equivalents, providing a clearer view of the company's debt burden.

Asset-side Valuation

Focuses on the entire company's value created by its assets, including revenue and profits.

Equity-side Valuation

Focuses on the value remaining for shareholders after debts are paid off.

Bridge from EV to Equity

Value is calculated by subtracting net debt from enterprise value to determine equity value.

Real-world Example

EV = $50M, debt = $10M, cash = $5M, resulting in equity value of $45M.

Importance to Buyers

Buyers need to ensure they are paying a fair price for the company’s assets and future potential.

Importance to Sellers

Sellers aim to get compensated fairly, especially in terms of equity value.

Real-World Analogy

Like valuing a house: EV is total house value, equity is what’s left after the mortgage.