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VALUATION OF SHARES : Valuation of shares in an amalgamation or takeover is made on a consideration of number of relevant factors such as: stock exchange prices of the shares of the two companies, the dividend paid on the shares, relevant growth prospects of the companies, values of the net assets etc. Even factors which are not evident from the face of the balance sheet like quality and integrity of the management,
present and prospective competition, market sentiments etc. are also required to be considered. Valuing a business also requires the determination of its future earnings potential, the risk inherent in those future earnings, etc.
e. Market Price Method / Open Market Valuation Method a. net asset value method : NAV method is based on the simple assumption that adding the value of all assets of the company and subtracting the liabilities, leaving a net asset
valuation can best determine the value of a business. NAV of a going concern is calculated with reference to the book value of the assets and liabilities, as at the date of proposed transfer. This is generally done on the basis of audited financial accounts of the year immediately preceding the date of the proposed transfer. The drawback in adopting net asset value method is that this method is generally considered appropriate in a case where we desire to wind up the business and realize the surplus assets or alternatively where the main strength of the business is its asset backing rather than its capacity or potential to earn profits.
b. Profit earning capacity value method : This method considers the earning potential of the business as a measure of its value. The estimation of earning potential is generally
made having regard to the trend of earning in recent years as well as in future with suitable adjustments for extra ordinary elements.
Drawback: The underlying assumption that the past performance will be repeated in the future, which, in a dynamic scenario of growth/inflation/recession, may not hold true.
C . RETURN ON INVETMENT METHOD :. The purpose of valuation based on earnings is to determine the annuity available to the buyer for his outlay which he would expect to be commensurate with the price paid. In this method from the last earning declared, items such as tax, preference dividend, if any, are deducted and net earnings are calculated for the purpose of valuation.
D. PRICE EARNING RATIO METHOD : Under this method, valuation of shares is done on the basis of Price Earning ratio of companies. Price earning Ratio of a company can be calculated by dividing the current price of a share by its EPS. Thus, P/E = P/EPS Where, P Current Price EPS Earning per share P/E Price Earning Ratio E. Market Price Method : Under this method valuation of shares/business is done on the basis of market price of shares. The market price of shares takes into account all the factors affecting the share price and hence is a good measure of valuation. The average market price will be determined taking into account the stock market quotations in the preceding 3 years (after making
appropriate adjustments for bonus issues and dividend payouts) as under: a. The high and low of proceeding 2 years; and b. The high and low of each month in the preceding 12 months. Drawback The market value of shares at times does not reflect the true worth of a company as it may be reacting to the global price movements, peculiar issues affecting the local industry, the management attitude, sudden interest by the institutional investors and the like. 2. ECONOMICALLY BASED METHEDOLOGY : A. Discounted Cash Flow Method : The economic based discounted cash flow method is based on the premise that the value of a business is a direct function of its cash generating ability.
This method values a business by discounting its free cash flows for a pre-determined forecast period to the present at a discount factor. For this purpose, free cash flows means the cash available for distribution to the capital providers, after considering the reinvestment required to sustain the operations and growth of the business. This method captures all the elements of the value of a business compared to Net Asset value and Price Earning Capacity Value approaches, the discounted cash flow method comprehends the values after considering capital investments and other cash flows required to sustain these earnings. Drabacks : It may suffer from creditability and objectivity because projections can only be made based on estimates and assumptions. Hence, the genuity of this method will substantially depend on the quality of information availablity .
Conclusion / Combination of Methods / Fair Value of Share : Reliance on only one method of valuation can be misleading. Therefore, fair value of shares can be determined only by a good combination of the aforesaid two or more methods, by assigning appropriate weights. The weighted average of the aforesaid two or more methods is then considered as the fair value of share. IMPORTANT METHOD OF VALUATION : In general, Net Asset Value Method, Return on Investment Method and Market Value method are the important methods of valuation. In the last, it should be concluded with the fair value of Shares. In the case of an unlisted company : Net Asset Value Method, Profit Earning Capacity Value Method, Return on Investment Method and Discounted Cash Flow Method are the important methods of valuation. In the last, it should be concluded with the Fair Value of Shares.
In the case of a listed compan : Price Earning Ratio Method and Market Value Method are the important methods of valuation. In the last, it should be concluded with the Fair Value of Shares. Valuation on the basis of willing buyer-willing seller Concept : While as a general rule, the concept of willing buyer-Willing seller is not accepted for various reasons. However, the price agreed to between the parties can be accepted in the following two categories of cases: 1. Small Value Asset 2. Where the fair value is close to the agreed price . SMALL VALUE ASSET METHOD : If the total consideration involved does not exceed Rs. 5 lacs and the shares being transferred do not constitute more than 10% of the total equity
shareholding of the company, the transaction may be approved as if the price agreed to between the parties does not exceed: the ruling market price, if it is a listed company; the price as certified by the auditors of the company, if it is an unlisted company.
MERGER & ACQUISITIONS : Global M&A is one of the most happening and fundamental element of corporate strategy in today's world. Many companies around the world have merged with each other with a motive to expand their businesses and enhance revenue. In the span of few years there are many companies coming together for betterment across the globe. Recent mergers and acquisitions 2011 are Lipton Rosen & Katz in New York, Sullivan & Cromwell LLP in New York, Slaughter & May in London, Mallesons Stephen Jaques in Sydney, and Osler Hoskin & Harcourt LLP in Toronto. Even in India merger and acquisition has become a fashion today with a cut throat competition in the international market. There are domestic deals like Penta homes acquiring Agro Dutch Industries, ACC taking over Encore Cement and Addictive, Dalmia Cement acquiring Orissa Cement, Edelweiss Capital acquiring Anagram Capital. All these are recent merger and acquisition 2010 valued at about USD 2.16 billion.
A) Tata Chemicals took over British salt based in UK with a deal of US $ 13 billion. This is one of the most successful recent mergers and acquisitions 2010 that made Tata even more powerful with a strong access to British Salt's facilities that are known to produce about 800,000 tons of pure white salt annually. B) Merger of Reliance Power and Reliance Natural Resources with a deal of US $11 billion is another biggest deal in the Indian industry. This merger between the two made it convenient and easy for the Reliance power to handle all its power projects as it now enjoys easy availability of natural gas. C) Airtel acquired Zain in Africa with an amount of US $ 10.7 billion to set new benchmarks in the telecom industry. Zain is known to be the third largest player in Africa and being acquired by Airtel it is deliberately increasing its base in the international market. D) ICICI Bank's acquisition of Bank of Rajasthan at aout Rs 3000 Crore is a greta move by ICICI to enhance its market share across the Indian boundaries especially in northern and western regions. E ) Fortis Healthcare acquired Hong Kong's Quality Healthcare Asia Ltd for around Rs 882 Crore and is now on move to acquire the largest dental service provider in Australia, the Dental Corp at about Rs 450 Crore.
country" mergers, such as the $29 billion dollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).