Topic 8.docx - Topic 8 | BBMF3183 Strategic Financial...

the stock market value is not necessarily suitable because existing
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For a takeover that involves a large number of shares (in order to gain control),
3. Therefore, valuation in practice involves considerable informed guesswork (inside
information often helps as well)
4. The over-valuation problem
 Paying more than the current market value, to acquire a company
recognisable market (e.g. shares in unquoted companies)
 During an acquisition, there is typically a fall in the price of the bidder and an
increase in the price of the target

Overvaluation may arise as miscalculation of potential synergies or

Overestimation
T 8: V
OPIC ALUATION OF MERGES AND
ACQUISITIONS
of
Valuation
Problem
1. So long as the market is reasonably efficient, the market price can be trusted as
a fair assessment of value
2. However, problems arise in valuing unique assets, or assets that have no
smooth earnings figures).

Poor business decisions that are aimed at creating the impression of success.

Poor acquisition decisions financed by inflated equity.
6. Valuation of quoted companies
example, delaying expenses and bringing forward revenue recognition to

The stock market value is readily available:
 For trading in small numbers of shares, the stock market value is a fair value
to be used


ability of acquiring firm's management to improve
performance
Topic 8 | BBMF3183 Strategic Financial Management
Both lead to a higher price than current market value
5. Problems with failing to respond to overvaluations
 Use of creative accounting to continue the illusion of good results (for


Use statement of financial position as starting point

This technique is sometimes used to estimate a minimum value for an
unquoted company that is in financial difficulties or is difficult to sell.
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
If there are similar listed companies (i.e. proxy), estimates can be made using
proxy data e.g. cost of equity, beta, dividend yield, P/E ratio however, this

has to be discounted by 20% to 30% because:

Relative lack of marketability of unquoted shares

Greater risk of poor quality financial information & being smaller
Valuation of unquoted companies
shareholders will not have the incentive to sell therefore, a premium is

normally offered on top of the current stock market value
 Conclusion: The current stock market price is used as the starting point for
calculations
7.
companies with more volatile earnings

No stock market value & less information published:

If there has been a recent private sale of the company’s shares, that price
can be used as a starting point for calculations
Dividend growth Book value of
equity
P/E x Net profit
(Market Value)
model
Discounted Cash
CIV method
Flow method
1. Asset-based models
Asset-based
Valuation Methods
BPP165 - 177
Valuation Methods
Cash Flow based
Topic 8 | BBMF3183 Strategic Financial Management
valuation
valuation
（ Present Value) (Book Value)
Earnings-based
valuation

2. Calculated Intangible Assets (CIV)

Intangible assets differ from tangible assets as they do not have physical