FREE online courses on Mergers & Acquisitions - Chapter 5 - Special Problems

 

Before we leave valuations, we should note some special problems that can influence the valuation calculation.

 

Private Companies

 

When valuing a private company, there is no marketplace for the private company. This can make comparisons and other analysis very difficult. Additionally, complete historical information may not be available. Consequently, it is common practice to add to the discount rate when valuing a private company since there is much more uncertainty and risk.

 

Foreign Companies

 

If the target company is a foreign company, you will need to consider several additional variables, including translation of foreign currencies, differences in regulations and taxes, lack of good information, and political risk. Your forecast should be consistent with the inflation rates in the foreign country. Also, look for hidden assets since foreign assets can have significant differences between book values and market values.

 

Complete Control

 

If the target company agrees to relinquish complete and total control over to the acquiring firm, this can increase the value of the target. The value assigned to control is expressed as:

       CV = C + M

       CV: Controlling Value

       C: Maximum price the buyer is willing to pay for control of the target company

       M: Minority Value or the present value of cash flows to minority shareholders.

      

If the merger is not expected to result in enhanced values (synergies), then the acquiring firm cannot justify paying a price above the minority value. Minority value is sometimes referred to as stand-alone value.