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Mergers and Acquisition: DR. Didit A. Ratam May 7, 2018

This document discusses frameworks and methods for valuing companies for mergers and acquisitions. It covers topics such as valuation frameworks, estimating the weighted average cost of capital (WACC), estimating continuing value through discounted cash flow models and other approaches, and factors that contribute to failures and successes of mergers. The key steps in a successful merger are outlined as managing the pre-acquisition phase, screening candidates, valuing remaining candidates, negotiating, and managing post-merger integration.

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Cynthia Wibowo
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71 views

Mergers and Acquisition: DR. Didit A. Ratam May 7, 2018

This document discusses frameworks and methods for valuing companies for mergers and acquisitions. It covers topics such as valuation frameworks, estimating the weighted average cost of capital (WACC), estimating continuing value through discounted cash flow models and other approaches, and factors that contribute to failures and successes of mergers. The key steps in a successful merger are outlined as managing the pre-acquisition phase, screening candidates, valuing remaining candidates, negotiating, and managing post-merger integration.

Uploaded by

Cynthia Wibowo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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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

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