MA 2024 - Lecture 02 (2)

Mergers & Acquisitions Lecture Overview

  • Lecture Title: Mergers & Acquisitions 2024/25 Lecture 2

  • Instructor: Utz Weitzel

  • Affiliation: Institute for Management Research, Department of Economics and Business Economics, Radboud University Nijmegen

  • Slides: Various interactive polls and lecture content to be covered over multiple sessions.

Background of the Instructor

  • Education:

    • Bachelor and PhD in Germany

    • Master’s degree in the UK

    • Postdoctoral position in Chicago

  • Professional Experience:

    • Consultant roles at Boston Consulting Group and Bayer AG

    • Partner in a private research company

  • M&A Experience:

    • Director/CFO of a satellite software company

    • Board member at a television network subsidiary

  • Current Position: Professor of Finance at VU Amsterdam & RU Nijmegen

  • Languages: English, Dutch, German, some Italian

Class Interaction

Polls Conducted

  • Finance Courses Completed Poll:

    • 1 course: 1 vote

    • 2 courses: 2 votes

    • 3 courses: 3 votes

    • 4 courses: 8 votes

    • 5 or more: 14 votes (50% of participants)

  • Stock or Bond Ownership Poll:

    • Yes: 19 votes (76%)

    • No, but on my list: 4 votes (16%)

    • No and not interested: 2 votes (8%)

Communication with Course Coordinator

  • Most common communication method:

    • Email to instructor: 15 votes (65%)

    • Email via Brightspace: 4 votes (17%)

    • Brightspace discussion board: 13 votes (57%)

    • In-class questions: 17 votes (74%)

Group Formation

  • Check if all participants have connected with their group members.

  • Instruct students to inform the instructor if there are issues via email or directly after lecture/break.

Course Material Overview

  • Textbook: Mergers, Acquisitions, and Other Restructuring Activities

    • Part I: M&A

    • Part II: M&A Process Environment

      • Chapter 1: Motivations for M&A

      • Chapter 2: Regulatory Considerations

    • Part III: M&A Valuation and Modeling

    • Part IV: Deal Structuring and Financing

    • Part V: Alternative Business and Restructuring Strategies

      • Chapter 17: Bankruptcy and Liquidation

Lecture Topics

  1. What is a valuation?

  2. Relative valuation approach

    • Basics

    • Comparable companies

    • Types of multiples

    • Estimating market value

    • Fundamentals

    • Application in 4 steps

  3. Asset-oriented methods

Valuation Approaches

  • Fundamental Approaches:

    1. Relative, market-based approach: Comparing assets with similar market assets.

    2. Intrinsic, income-based approach: Based on income potential, often through DCF analysis.

    3. Contingent claims approach: Considering options for abandonment, expansion, delay.

  • Asset-based valuation is not a separate approach but uses the above methods focusing on firm assets.

Understanding Relative Valuation

  • Fundamental Steps to Relative Valuation:

    1. Identify comparable companies.

    2. Convert market values into standardized values by dividing comparable asset value by a value indicator.

    3. Multiply value indicator of the target company by average multiple calculated to reach market value.

Common Multiples Used in Valuation

  • Equity Valuations:

    • ~85% of equity research reports use multiples.

    • 50% of all acquisition valuations rely on multiples, often using DCF as backup.

  • Common Examples:

    • Price-to-Earnings (P/E)

    • Price-to-Book (P/B)

    • Price-to-Sales (P/S)

Practical Example: Valuation of a House

  1. Compare sold houses pricing.

  2. Calculate average multiples based on indicators like square footage.

  3. Apply average multiple to the target property to estimate its value.

Application of Valuation Methods

Approaching Valuation for Companies

  • MVT (Market Value of Target Company) Calculations:

    • Formula: MVT = avg[(MVC / VIC)] x VIT where MVC = market value of comparable company.

Key Considerations

  • Understand that valuation is a craft involving principles and subjective estimations.

  • Recognize potential failure in valuations due to poor market timing or overestimating synergies.

Importance of Multiples and Fundamentals

  • Multiples are influenced by fundamental company characteristics: growth, risk, cash flows.

  • The choice of multiples—like P/E vs. EV/EBITDA—should be appropriate to the sector and scenario to obtain reliable valuations.