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Valuation for M&A: Building Value in Private Companies, 2nd Edition

ISBN: 978-0-470-60441-0
400 pages
June 2010
Valuation for M&A: Building Value in Private Companies, 2nd Edition (0470604417) cover image


Discover the tools necessary to determine what your company's value is, what drives its value, and how to enhance that value during an M&A transaction.

The only book to focus on valuation specifically for mergers and acquisitions, Valuation For M&A: Building Value in Private Companies, Second Edition lays out the steps for measuring and managing value creation in privately held businesses. This groundbreaking work led directly to authors Chris M. Mellen and Franck C. Evans being named the joint 2010 AM&AA Middle Market Thought Leader of the Year by the Alliance of Merger & Acquisition Advisors, and its thorough overview of the subject:

  • Recognizes a company as an investment and explains how to manage that value to maximize shareholder returns, focusing on returns, risks, and capital invested
  • Explains investment or strategic value versus fair market value and provides a document request checklist; sample interview questions; and formats for adjusting financial statements, developing discount rates, the computation of net cash flow; and a valuation reconciliation form
  • Includes a comprehensive case study to illustrate concepts and calculations
  • Now covers fair value accounting and the impact of SFAS Nos. 141, 142, and 157 and their IFRS counterparts, intangible asset valuation techniques, exit planning, international M&As, and venture backed/early stage companies

Showing corporate executives as well as M&A professionals and business appraisers how to value privately-held businesses for merger and acquisition purposes, this book helps investors, executives, and their advisors determine the optimum strategy to enhance both market value and strategic value to maximize return on investment.

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Table of Contents

Preface xi

Dedication and Acknowledgments xv

CHAPTER 1 Winning through Merger and Acquisition 1

Critical Values Shareholders Overlook 2

Stand-alone Fair Market Value 4

Investment Value to Strategic Buyers 5

“Win-Win” Benefits of Merger and Acquisition 7

CHAPTER 2 Building Value and Measuring Return on Investment in a Private Company 13

Public Company Value Creation Model 13

Computing Private Company Value Creation and ROI 15

Analyzing Value Creation Strategies 30

CHAPTER 3 Competitive Analysis 37

Linking Strategic Planning to Building Value 39

Assessing Specific-Company Risk 40

Competitive Factors Frequently Encountered in Nonpublic Entities 45

Financial Analysis 46

Conclusion 51

CHAPTER 4 Merger and Acquisition Market and Planning Process 53

Common Seller and Buyer Motivations 55

Why Mergers and Acquisitions Fail 57

Sales Strategy and Process 58

Acquisition Strategy and Process 66

Due Diligence Preparation 77

CHAPTER 5 Measuring Synergies 81

Synergy Measurement Process 82

Key Variables in Assessing Synergies 85

Synergy and Advance Planning 86

CHAPTER 6 Exit Planning 89

Why Is Exit Planning So Difficult? 90

What Makes Planning for Your Private Company Investment Unique? 93

Why Should Exit Planning for Your Private Company Begin Now? 95

Exit Planning Process 96

Step 1: Setting Exit Goals 98

Step 2: Owner Readiness 99

Step 3: Type of Exiting Owner 100

Step 4: Exit Options 101

Step 5: Range of Values 105

Step 6: Execution of Exit Plan 107

CHAPTER 7 Valuation Approaches and Fundamentals 109

Business Valuation Approaches 109

Using the Invested Capital Model to Define the Investment Being Appraised 111

Why Net Cash Flow Measures Value Most Accurately 112

Frequent Need to Negotiate from Earnings Measures 114

Financial Statement Adjustments 117

Managing Investment Risk in Merger and Acquisition 120

Conclusion 125

CHAPTER 8 Income Approach: Using Rates and Returns to Establish Value 127

Why Values for Merger and Acquisition Should Be Driven by the Income Approach 127

Two Methods within the Income Approach 129

Three-Stage DCF Model 134

Establishing Defendable Long-term Growth Rates and Terminal Values 135

CHAPTER 9 Cost of Capital Essentials for Accurate Valuations 141

Cost of Debt Capital 142

Cost of Preferred Stock 143

Cost of Common Stock 144

Fundamentals and Limitations of the Capital Asset Pricing Model 145

Modified Capital Asset Pricing Model 148

Build-up Model 149

Summary of Ibbotson Rate of Return Data 155

Private Cost of Capital 156

International Cost of Capital 158

How to Develop an Equity Cost for a Target Company 158

CHAPTER 10 Weighted Average Cost of Capital 163

Iterative Weighted Average Cost of Capital Process 164

Shortcut Weighted Average Cost of Capital Formula 168

Common Errors in Computing Cost of Capital 170

CHAPTER 11 Market Approach: Using Guideline Companies and Strategic Transactions 173

Merger and Acquisition Transactional Data Method 174

Guideline Public Company Method 178

Selection of Valuation Multiples 181

Market Multiples Commonly Used 183

CHAPTER 12 Asset Approach 189

Book Value versus Market Value 190

Premises of Value 191

Use of the Asset Approach to Value Lack-of-Control Interests 191

Adjusted Book Value Method 192

Treatment of Nonoperating Assets or Asset Surpluses or Shortages 197

Specific Steps in Computing Adjusted Book Value 197

CHAPTER 13 Adjusting Value through Premiums and Discounts 199

Applicability of Premiums and Discounts 200

Application and Derivation of Premiums and Discounts 201

Apply Discretion in the Size of the Adjustment 203

Control versus Lack of Control in Income-driven Methods 204

Fair Market Value versus Investment Value 205

CHAPTER 14 Reconciling Initial Value Estimates and Determining Value Conclusion 207

Essential Need for Broad Perspective 207

Income Approach Review 210

Market Approach Review 215

Asset Approach Review 216

Value Reconciliation and Conclusion 218

Checks to Value 220

Candidly Assess Valuation Capabilities 221

CHAPTER 15 Art of the Deal 223

Unique Negotiation Challenges 223

Deal Structure: Stock versus Assets 225

Terms of Sale: Cash versus Stock 231

Bridging the Gap 233

See the Deal from the Other Side 236

CHAPTER 16 M&A and Financial Reporting 239

U.S. GAAP and IFRS 240

Relevant FASB and IFRS Statements 241

Reviews by the Audit Firm 242

ASC 820: Fair Value Measurements (SFAS 157) 243

ASC 805: Business Combinations (SFAS 141(R)) 246

ASC 350: Goodwill and Other Intangible Assets (SFAS 142) 255

Incorporating ASC 805 (SFAS 141(R)) into the Due Diligence Process 257

References 260

CHAPTER 17 Intangible Asset Valuation 263

Approaches to Valuing Intangible Assets 264

Key Components to Intangible Asset Valuation 266

Intangible Asset Valuation Methods 275

Conclusion 284

CHAPTER 18 Measuring and Managing Value in High-Tech Start-ups 285

Why Appraisals of High-Tech Start-ups Are Essential 285

Key Differences in High-Tech Start-ups 287

Value Management Begins with Competitive Analysis 288

Stages of Development 290

Risk and Discount Rates 292

Start-ups and Traditional Valuation Methods 293

QED Survey of Valuation Methods Used by Venture Capitalists 298

A Probability-Weighted Scenario Method to Value Start-ups 303

Equity Allocation Methods 309

Conclusion 311

CHAPTER 19 Cross-Border M&A 313

Strategic Buy-Side Considerations 313

Due Diligence 322

Sell-Side Considerations 326

CHAPTER 20 Merger and Acquisition Valuation Case Study 329

History and Competitive Conditions 330

Potential Buyers 331

General Economic Conditions 332

Specific Industry Conditions 333

Growth 334

Computation of the Stand-alone Fair Market Value 334

Computation of Investment Value 348

Suggested Considerations to Case Conclusion 356

About the Authors 359

Index 361

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Author Information

CHRIS M. MELLEN, ASA, MCBA, CM&AA, is president and founder of Delphi Valuation Advisors, Inc. (www.delphivaluation.com), located in Boston, Massachusetts and a principal in American Business Appraisers®. He is an Accredited Senior Appraiser (ASA), Master Certified Business Appraiser (MCBA), and Certified Merger & Acquisition Advisor (CM&AA). Chris also holds an MBA with a concentration in finance from Babson College and a bachelor of arts with a major in industrial relations and economics from McGill University. His experience includes completion of over 1,800 valuation assignments since 1989 in a wide range of industries for such purposes as strategic planning, mergers and acquisitions, tax and estate planning and compliance, financial reporting, financing, buy-sell agreements, litigation, and appraisal review. He can be contacted at cm@delphivaluation.com.

FRANK C. EVANS, ASA, CBA, is the founder of Evans and Associates Valuation Advisory Services (www.evansandassociates.net), in Pittsburgh, Pennsylvania, and a principal in American Business Appraisers®. He holds the Accredited Senior Appraiser (ASA) and Certified Business Appraiser (CBA) designations and held the Certified Public Accountant Accredited in Business Valuation (CPA/ABV) designation. With an MBA and a bachelor of arts degree in economics from the University of Pittsburgh, he performs valuations and related consultation for strategic planning, merger and acquisition, tax planning, shareholder agreements and disputes, and litigation support. He is the coauthor with David Bishop of the first edition of Valuation for M&A and can be reached at fevans@evansandassociates.net.

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