Valuation for Mergers and Acquisitions


Master Today?s Best Practices for Valuing Companies

?Petitt and Ferris show us the data required for valuing a company, what computations to perform, and the advantages and drawbacks of each technique. This very practical book is an outstanding guide for company executives, financial managers, valuation practitioners, and investment professionals.?
?Professor Elroy Dimson, London Business School and Cambridge ...

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Valuation for Mergers and Acquisitions

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Master Today’s Best Practices for Valuing Companies

“Petitt and Ferris show us the data required for valuing a company, what computations to perform, and the advantages and drawbacks of each technique. This very practical book is an outstanding guide for company executives, financial managers, valuation practitioners, and investment professionals.”
—Professor Elroy Dimson, London Business School and Cambridge Judge Business School

“Valuation is a key factor for success in any M&A transaction. This book contains a comprehensive set of tools and a conceptual framework for tackling practical challenges of valuations. It is richly illustrated by concrete examples of best practices and pitfalls to avoid.”
—Yves Courtois, CFA, CMT, Corporate Finance Partner at KPMG, Co-Head of KPMG’s Global Valuation Institute

Valuation is the essence of finance. But it is an art, not a science: Corporate executives and valuation analysts face many choices and dilemmas when assessing a company’s value. This concise guide offers an up-to-date, practitioner-oriented view of valuation in the context of mergers and acquisitions (M&A) and corporate restructurings. It has been extensively revised to present today’s most widely used valuation methods, and to offer realistic solutions for making informed choices and dealing with common dilemmas.

Leading experts Barbara S. Petitt and Kenneth R. Ferris cover the entire valuation process, presenting practical advice and real-world examples and illustrations. They review and compare frequently used valuation methods, including discounted cash flow models, earnings multiples, economic value analysis, and real option analysis.

Petitt and Ferris address issues that are closely related to valuation, such as accounting, financial reporting, and tax considerations. They also identify common valuation errors and show how to avoid them. Whether you are an executive or an analyst, this guide will help you play a far more effective role in valuation for M&As or corporate restructurings.

• Understanding the challenges of valuation
Why valuation errors cause so many acquirers to overpay
• Understanding valuation methods and tradeoffs
When and how to use multiples, discounted cash flow models, or real option analysis
• Performing financial review and pro forma analysis
How to analyze a company’s performance and forecast its future earnings and cash flows
• Avoiding overconfidence and the “winner’s curse”
How to uncover assumptions that could wreck your forecasts and valuation

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Product Details

  • ISBN-13: 9780133372670
  • Publisher: FT Press
  • Publication date: 7/12/2013
  • Edition number: 2
  • Pages: 256
  • Product dimensions: 5.90 (w) x 9.10 (h) x 1.10 (d)

Meet the Author

Barbara S. Petitt, PhD, CFA, is Director, Curriculum Projects, EMEA at CFA Institute. She has an in-depth knowledge of equity valuation, mergers, acquisitions, and corporate restructurings. She has held academic positions at Thunderbird, School of Global Management in the U.S., Bournemouth University in the U.K., and SKEMA Business School in France, and consulted with corporate clients throughout Europe and North America. Petitt resides in Poole, U.K.

Kenneth R. Ferris, a valuation and acquisition consultant to small and mid-cap companies in Central America, served on the faculty at Northwestern’s Kellogg School of Management; SMU’s Cox School of Business; Thunderbird School of Global Management; Drucker School of Business at Claremont Graduate School, and Arizona State’s W.P. Carey School of Business. He was a director for three NYSE-listed firms. Ferris resides in Placencia, Belize.
Valuation for Mergers and Acquisitions 9780133372670 Front Matter, pg 1

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Table of Contents

Preface vii

Chapter 1 Valuation: An Overview 1
Market View 1
1 Why Companies Merge or Acquire: A Historical Perspective 3
1.1 Mergers and Acquisitions Waves 3
1.2 Motivations for Mergers and Acquisitions 6
2 Do Mergers and Acquisitions Create Shareholder Value? 8
3 Merger and Acquisition Premiums 9
4 Valuation Process 10
5 Valuation Methods: An Overview 12
5.1 Relative Valuation Methods 14
5.2 Direct Valuation Methods 17
5.3 The Use of Valuation Methods 19
Summary 20
Endnotes 20

Chapter 2 Financial Review and Pro Forma Analysis 23
Market View 23
1 Financial Review 25
1.1 Ratio Analysis 26
1.2 Decomposition Analysis 32
1.3 Cash Flow Analysis 42
2 Pro Forma Analysis 49
2.1 Pro Forma Financial Statements 49
2.2 Sensitivity, Scenario, and Monte Carlo Simulation Analyses 59
Summary 60
Endnotes 61
Appendix 2A: Mattel’s Financial Statements 66
Appendix 2B: Preparation of a Cash Flow Statement. . . . 69
Cash Flow Fundamentals 69
Summary 81
Appendix 2C: Account Forecasting Alternatives 82

Chapter 3 Traditional Valuation Methods 85
Market View 85
1 Earnings Multiples 87
2 Discounted Cash Flow Models 92
2.1 Operational Dilemmas 92
2.2 Estimating the Entity Value and Equity Value 104
2.3 A Survey of Best Practices 108
2.4 Cross-Border Considerations 109
2.5 Illustration 111
Summary 118
Endnotes 119
Appendix 3: Some Frequently Asked Questions and Answers About the Free Cash Flow to the Firm Model and Earnings Multiples 124

Chapter 4 Alternative Valuation Methods 133
Market View 133
1 Relative Valuation Methods 136
1.1 Price Multiples 136
1.2 Enterprise Value Multiples 141
2 Direct Valuation Methods 144
2.1 Discounted Cash Flow Models 144
2.2 Economic Income Models 158
2.3 Real Option Analysis 165
Summary 170
Endnotes 171
Appendix 4: How to Use the Black-Scholes Model to Value a Red Option 176
Black-Scholes Model 177
Luehrman’s NPVq/Cumulative Volatility Approach 178

Chapter 5 Accounting Dilemmas in Valuation Analysis 181
Market View 181
1 Assessing Economic Reality 183
2 Income Statement Transformations: Forecasting Permanent Earnings and Free Cash Flows 185
2.1 Recurring and Nonrecurring Events 185
2.2 Revenue Recognition Policy 186
2.3 Inventory Costing Policy 190
2.4 Depreciation Policy 193
3 Balance Sheet Transformations: Forecasting the Equity Value of a Company 195
3.1 Asset Capitalization Policy 196
3.2 Asset Revaluation Policy 199
3.3 Off-Balance-Sheet Debt 200
4 Cash Flow Statement Transformations: Forecasting CFFO and Free Cash Flow 205
Summary 206
Endnotes 208

Chapter 6 Financial Reporting and Tax Considerations for Mergers and Acquisitions 211
Market View 211
1 Financial Reporting: To Combine or Not to Combine? 213
2 Consolidated Financial Reporting: Purchase Accounting 214
3 Noncontrolling Interest 218
4 Accounting for Goodwill 220
5 Tax Considerations of Mergers and Acquisitions 222
6 Tax Considerations of Goodwill 224
Summary 225
Endnotes 225

Chapter 7 Some Final Thoughts 229
Market View 229
1 Valuation: A Debriefing 230
2 Some Caveats to Consider 231
3 Closure 233
Endnote. 233

Bibliography 235
Index 239

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