Corporate Valuation in Mergers and Acquisitions

In every M&A transaction, the starting point for the board of the Acquirer is to decide if it makes economic sense to acquire the Target. If the answer is yes, then the next question is: “What price should be offered (or Bid) for the Target?” Similarly, in every M&A transaction, the starting point for the board of the Target is to decide if it makes economic sense to sell the Target. If the answer to that question is yes, then the next question is: “What price should be “Asked” for the Target?” 

In virtually all situations, the initial “Bid” price offered by the Acquirer’s board will be lower than the initial “Ask” price proposed by the Target’s board. If cash is the consideration the two parties must focus the valuation issue only on the Target. However, if stock is the consideration, both parties must focus this valuation issue on both the Target and the Acquirer.

Bottomline: In every M&A transaction, the valuation of the Target is central to the transaction, and also, in stock deals, the valuation of the Acquirer is central to the transaction. These principles were captured by the then Vice Chancellor Strine of the Delaware Cout of Chancery (later Chancellor and Chief Justice of the Delaware Supreme Court) in his 2002 decision in Pure Resources (2002 Del. Ch. Lexis 112), where he said: “[T]he most important issue to [a Target’s] stockholders [is the] sufficiency of the consideration being offered to them for their shares in a merger or tender offer.”  

The purpose of Corporate Valuation in Mergers and Acquisitions is to provide a guide to these central valuation issues in M&A transactions. Topics that will be covered include:

• A high-level introduction to some important economic, accounting, and finance principles impacting valuation (10 minutes);
• An overview of the principal elements of the Discounted Cash Flow (DCF) Model (40 minutes):
• Computation of periodic free cash flows (FCFs);
• Computation of the terminal value (TV); 
• Determining the Capital Asset Pricing Model’s (CAPM’s) risk-free rate and market risk premium; 
• Exploring CAPM’s Beta, with a few words on the rationale for the Beta levering and unlevering process;
• Bringing the elements of CAPM together in computing the Target’s equity cost of capital;
• Briefly introducing the computation of the costs of the Target’s (1) debt, and (2) preferred stock;
• Briefly introducing the computation of the Target’s discount rate under the Weighted Average Cost of Capital (WACC) method;
• Putting the DCF model all together by determining the value of the Target’s operating assets by discounting the Target’s FCFs and TV to present value at the WACC; and  
• A quick introduction to the “Corporate Valuation in M&A Seven-Step DCF Model for the Valuation of a Target,” or the “CVM&A- Seven-Step DCF Model”), available to the public at no cost on the Penn State Law website at https://elibrary.law.psu.edu/valuation/. 
• A brief introduction to the Relative Value Techniques used in M&A: Comparable Companies and Comparable Transactions (10 minutes).

Participants in this One-Hour Briefing are entitled to a 35% discount off PLI’s Corporate Valuation in Mergers and Acquisitions, authored by Samuel C. Thompson, Jr. Simply enter discount code OHB4 CVMA into both priority code boxes in your cart prior to checkout.

Who Should Attend: Lawyers, investment bankers, accountants, and other professionals who are involved in M&A transactions.

Program Level: Overview

Prerequisites: None

Advanced Preparation: None

Faculty:

Samuel. C. Thompson, Jr.

Arthur Weiss Distinguished Faculty Scholar, Professor of Law, and Director, Center for the Study of Mergers & Acquisitions

Penn State Law