VALUATION METHODS OF

MERGERS & ACQUISITIONS

By
Group 1.
 Value is

 Cost vs. market value

 Historical vs. Replacement
 Differs depending on need of the person who
is doing valuation- buyer, seller, employee,
banker, insurance company
 Valuation Process

 Review and selection of valuation methods.

 Understanding the issues which impact
valuation.
 Special situations and their impact on
valuation
 Why Valuation?

 To purchase
 To sell
 To transact
 To take decisions
 To report
 Valuation Methods

 They can be broadly classified into three:

 Cost Based
 Income Based
 Market Based
 Within these methods there are sub-methods
 Cost Based Methods

 Book Value

 Replacement Value

 Liquidation Value
 Book Value Method

 Historical cost evaluation

 All assets are taken at historical book value.
 Value of goodwill is added to the above figure
to arrive at the valuation
 Book Value Method

 Current Cost Valuation

 All assets are taken at current value and
summed to arrive at value
 This includes tangible assets, intangible
assets, stock, investments and receivables

 VALUE= ASSETS - LIABILITIES

 Replacement Value Method

 Cost of replacing existing business is taken as

the value of business
 The replacement costs of its assets –
liabilities.
 Liquidation Value Method

 Value, if a company is not going concern

 Based on the value that will be derived if the
firm’s assets were liquidated.
 Income Based Methods

 Earnings capitalization method or profit

earning capacity value method

 Discounted cash flow method

 Earnings Capitalization
Method
 Company’s Value is determined by
capitalizing its earning at a rate considered
suitable
 Assumption is that future earning potential of
the company is the underlying value driver of
the business
 Suitable for fairly established business having
predictable revenue and cost models
 Discounted Cash Flows

 Cash Flows statements are made

 Net Present Value is helps in assessing the
value
 The cash flow from year 1 to year n is
calculated and is discounted to arrive at the
present value of future cash flows from year 1
to year n
 Market Based Method

 Also known as relative method

 Assumption is that other firms in the industry
are comparable to the firm being valued
 Standard parameters are used like earnings,
profit, book value
 Valuation is based on

 Management Team
 Historical Performance
 Future Projections
 Project, product, USP
 Industry Scenario
 Country Scenario
 Market Opportunity, growth expected,
barriers to competition
 Valuation depends on

 Nature of Competition
 Amount of Money Required
 Stage of Company (Pre-IPO, IPO)
 Strategic Requirements ( needs of the
company)
 Demand/Supply Position
 Flavor of the Season
Thank you.