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21model 10/6/2009 8:15 Chapter 21. Model for Analyzing Corporate Mergers In theory, merger analysis is quite simple. The acquiring firm performs an analysis to value the target comp acquiring firm then seeks to buy the firm at preferably below that estimated value. Meanwhile, the target co would only want to accept the offer if the price exceeds its value if operated independently. In practice, how process of merger analysis is much more involved and raises some difficult issues. While many valuation techniques exist, we shall focus upon the two most common: the discounted cash flow multiple analysis. Regardless of the method used, it is crucial to recognize that the target company typically continue to operate as a separate entity, but rather it becomes part of the acquiring firm's portfolio of risky This is significant because the operational changes that may occur will affect the value of the business and m considered. In addition, it is important to remember that the goal of merger evaluation is to value the target equity, because the business is acquired from the company's owners, not its creditors. For that reason, our f be the value of equity, not total value. DISCOUNTED CASH FLOW ANALYSIS This process is very much like the process employed in Chapter 8 of the text to value stock. This method ope under the assumption that the intrinsic value of a firm is determined by the future cash flows that the firm w generate, discounted to the present. The first step in this approach is to create pro forma income statements for the target company as a subsidia acquiring firm. The purpose of these pro forma statements is to project expected cash flows, because the inc free cash flows generated by the merger are one of the key drivers of the valuation. The other driving factor
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This note was uploaded on 05/31/2009 for the course MBA 4500 taught by Professor Eyupcetin during the Spring '09 term at Istanbul Technical University.

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