Mergers and Acquisition

DR. Didit A. Ratam

May 7, 2018
 Valuation
• Valuation Framework / Financial Model
1. Imagine Process (detailed) and Set Up Assumptions (accuracy) – Seller’s Credibility
2. Project Cash Flow
3. Discount Rate
4. Valuation
• Discount Rate
• Whose perspective (seller or buyer)
• Valuation Framework
1. Analyzing Historical Performance
2. Imagine Process (detailed) and Set Up Assumptions (accuracy) – Seller’s Credibility
3. Project Cash Flow
4. Estimating Cost of Capital / Discount Rate
5. Estimating Continuing Value
6. Valuation
 Estimating Cost of Capital
• Weighted Average Cost of Capital (WACC)
• Includes debt, equity and otherwise
• Cash flow should be after-(corporate) tax

WACC = kb (1 – Tc) (B/V) + kp (P/V) + ks (S/V)

 WACC
WACC = kb (1 – Tc) (B/V) + kp (P/V) + ks (S/V)
where:
kb =cost of Debt kp = Cost of preferred stocks
Tc = Tax rate P = Preferred stocks
B = Debt ks = Cost of equity
V = Total Capital S = Equity (excludes Preferred stocks)
 Estimating Continuing Value
DCF Based
• Long Explicit Forecast
• Free Cash Flow (FCF) growing in Perpetuity
• Value Driver Formula

Non-DCF Based
• Liquidation Value
• P/E
 Free Cash Flow (FCF) growing in Perpetuity

FCF T+1
CV = ----------------
WACC – g
where :
FCF = Free Cash Flow
g = growth rate
WACC = Weighted Average Cost of Capital
 Value Driver Formula
NOPLAT T+1 (1-g/ROIC)
CV = -----------------------------------------
WACC – g
Where :
NOPLAT = Net Op. Profit less Adjusted Taxes
g = growth rate
WACC = Weighted Average Cost of Capital
 Reason for Failures of Mergers
• Over-optimistic Appraisal of Market Potential
• Over-estimation of Synergies
• Over-bidding
• Poor Post-acquisition Integration
 Steps in A Successful Merger
1. Manage Pre-acquisition Phase
• Evaluate your own company, understanding industry structure, strengthening core business,
economies of scale, technology
2. Screen Candidates
• Size, location, strategy, overall performance, availability
3. Value Remaining Candidates
4. Negotiate
5. Manage post-Merger Integration