Meta: M&A plays a crucial role in creating change in the environment of a company.

M&A Valuation: A Comprehensive Exploration

 

Mergers and acquisitions (M&A) play a crucial role in the modern business landscape, serving as a strong strategy for companies wishing to expand, diversify, or reorganize their operations within this dynamic market. At the heart of every successful M&A Vietnam transaction is a meticulous process known as valuation, which includes the careful assessment, analysis, and appraisal of a company's value. In this blog, we will explore the complexities of the M&A valuation process in the Vietnamese context to gain a deeper insight into this procedure.

 

What Are Mergers And Acquisitions (M&A)?

 

Mergers and acquisitions (M&A) refer to the combination of companies or major business assets through financial transactions executed between these entities.

The definition of merger and acquisition

 

This can involve a process in which a company is acquiring and fully integrating another, merging to form a new firm, obtaining some or all of its assets, initiating a tender offer for its stocks, or executing a hostile takeover.

A merger is the combining of two similar companies to form a single entity while an acquisition pertains to one company acquiring another.

Specifically, an acquisition takes place when one company takes over another company. Conversely, a merger refers to the collaboration of two companies of roughly equal size, uniting to operate as a singular new entity rather than maintaining separate ownership and operations.

There are numerous of types of mergers and acquisitions, consisting of vertical, horizontal, congeneric, market-extension, product-extension, and conglomerate.

These are commonly used practices in business to enhance operational strength, boost performance, and establish a more effective business. Additionally, M&A plays an incredible role in making a change in a company's overall environment by creating a new business entity, or by creating a new strategic partnership in the market.

 

Fundamentally, if executed effectively, M&A can offer businesses strategic advantages. Numerous companies have employed mergers and acquisitions to broaden their scope of operations. Indeed, there are numerous instances of successful M&A transactions in today's marketplace.

 

Important M&A Valuation Methods

Each party involved in an M&A transaction, whether the buyer or the seller, will assess the value of the target company differently. The seller naturally seeks to assign the highest possible value to the company, whereas the buyer endeavors to secure it at the lowest possible price. Fortunately, M&A valuation can be determined by examining similar companies within an industry and utilizing specific metrics

 

Price-to-Earnings Ratio (P/E Ratio)

By the tax after profits, the PE ratio is calculated by dividing the company’s valuation. This M&A valuation method can help you to ascertain the company's value based on price earnings, the evaluator needs to multiply the after-tax profit by an appropriate multiple.

Evaluating the equity value of a company involves subtracting any debt and adding any excess cash. Hence, the P/E ratio serves as a method to gauge the equity value of a company.

 

Discounted Cash Flow (DCF)

A key tool in M&A valuation, a discounted cash flow (DFC) analysis determines a company's current value, based on its estimated future cash flows. While it is acknowledged that performing a DCF analysis accurately can be challenging, few methods can match the effectiveness of this M&A valuation approach.

 

Replacement cost

To simplify, imagine a company's value as the total of its equipment and staffing costs. The acquiring company can straightforwardly propose that the target sells at that price, or it will create a competitor for the same cost.

However, the process of having great management, and acquiring property and suitable equipment is a time-consuming endeavor. This M&A valuation pricing method may not be practical, especially in service industries where the primary assets (people and ideas) are challenging to value and develop.

 

EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization)

 

This M&A valuation metric is employed to assess a company's financial performance relative to other businesses of similar size, excluding factors such as corporate taxation, capital spending, and working capital financing that may lead to distortions. Consequently, it proves to be a worthy M&A valuation for determining the value of a company.

 

Net asset

Much like the asset approach, the net asset value (NAV) of a company correlates directly with the outcome of its M&A valuation. The calculation of net asset value involves aggregating all of the company's assets and deducting its liabilities. It is worth noting that this approach is particularly applicable to asset-rich companies, such as those in real estate or manufacturing.

 

Comparable analysis

As implied by its name, this method closely resembles the market approach, comparing comparable companies to find its value. The information, including the target company's sales, earnings, assets, and

 

other relevant factors, is documented and analyzed for a precise valuation. Consequently, this method is employed when comparable companies are accessible for comparison.

 

Revenue multiple

This M&A valuation method assesses the value of a business related to its revenue and can be used to offer insights into whether acquiring the seller's company is cost-effective or expensive.

This method can be employed to assess the value of companies with clearly defined sales and profit margins. Consequently, the determination of a company's value is facilitated through the utilization of a revenue multiple..

 

Precedent analysis

This approach is applied when there are comparable transactions recently executed. The precedent analysis method incorporates EBITA and revenue multipliers, along with any other desired multiples by the analyst. Essentially, this method involves determining the value of a company by comparing it to similar transactions.

 

Dividend yield

Much like discounted cash flow analysis, this M&A valuation method assesses the current value of a future dividend to “prove” its worth.

This approach is established on a similar idea as the DCF approach, wherein the company’s present value is determined by discounting a series of its future dividends.

In other words, projected dividend payments are identified and scrutinized, and using an appropriate discount rate, they are discounted to their present value. Consequently, the valuation of the company is determined based on this present value.

 

Common Challenges Associated With M&A Valuation And Strategies To Overcome

The process of M&A valuation is intricate, involving the assessment of the value of a target company or its assets. Numerous challenges and

complexities are associated with M&A valuation, and these factors can influence the precision and success of the transaction.

 

Common challenges related to M&A valuation

 

Here are some typical challenges:

 

Lack of communication

 

Effective communication holds the potential to either establish or undermine a deal in a matter of moments. From initial negotiation stages to integration and the amalgamation of company cultures, consistent and frequent dialogue between the management and employees of the merging companies is crucial to ensure alignment and a shared vision.

 

Additionally, communication with the media should not be overlooked as well. Communicating with your employees early and regularly, so they know what to expect.

 

You can utilize a virtual data room as a platform that can facilitate this process, creating a designated conversation thread or a Q&A section to answer all employee questions in one place.

Security threats

In the digital era, data stands out as one of the most influential resources. When a company undergoes an acquisition, substantial amounts of sensitive

information, including brand secrets, intellectual property, financial statements, and employee personnel files, are shared among various stakeholders.

This wealth of data becomes a prime target for cybercrime. Opting for secure data room software can prevent numerous challenges and costs linked to digital data breaches.

 

Poor evaluation and overestimation

Numerous M&A transactions have failed to bring value to the buyer due to inadequate evaluation, resulting in overpayment. You can reduce the risk by taking proactive measures and setting up an analytical, scrutinized approach to due diligence.

A meticulous examination of available data will contribute to more data-driven assumptions. Adjusting your strategy based on these findings is crucial.

Another important aspect is to share relevant findings with your experts to ensure everyone is informed about the conditions and can adjust their expectations accordingly.

To reduce the risk of overestimation, you should consider using a virtual data room. A virtual data room will help organize files, securely share information with your team, and offer a comprehensive deal overview.

With a virtual data room, generating reports becomes quicker, files can be reviewed simultaneously, real-time communication with the team is facilitated, and all essential facts are available for negotiations with the seller.

 

Overlooking transition time

One common issue in merger and acquisition scenarios is the insufficient allocation of time and resources for the transition phase. Recognizing the learning curve is crucial for a successful post-merger integration, and it is essential to motivate employees to collaborate with the newly consolidated team.

To address this challenge, it is imperative to have a well-defined post-merger strategy and allocate resources for managing the transition.

Establishing effective communication channels, fostering a collaborative atmosphere instead of competition, implementing internal policies, and

conducting cross-cultural training are vital steps to merge the best talent from both companies for enhanced productivity.

Successfully navigating these challenges requires careful due diligence, collaboration between various stakeholders, and a thorough understanding of both the target and acquiring companies.

Additionally, engaging experienced financial advisors and legal experts can help mitigate risks associated with M&A valuations.

 

Mergers And Acquisitions Examples List

Since 2010, approximately half a million mergers and acquisition deals have been completed across the globe. Although the overall number of M&A deals showed some fluctuations starting from 2016, it witnessed a significant surge, reaching 63,000 by the end of 2021. In the same year, the total number of mergers and acquisitions deals approached nearly six trillion dollars.

 

Merger Examples

Liberty Global and Telefónica, $38 billion in 2020

In May, the British units of Liberty Global and Telefónica announced their collaborative venture. This transaction is expected to achieve £700 million in synergies. The target was to integrate Telefónica’s British mobile operator O2 and Liberty’s Virgin Cable network company. The estimated value of the transaction stood at $38 billion.

 

BHP Group Limited and BHP Group plc.in 2021

Regarded as the most significant merger in Australia for 2021, the integration of BHP Group Limited and BHP Group plc was primarily driven by the aim to create a unified and robust mining corporation in the Australian market. The objective was to streamline the corporate structure, providing the company with enhanced strategic flexibility, ultimately leading to a stronger portfolio and the exploration of new growth opportunities.

 

Discovery Inc. and AT&T (United States WarnerMedia), $43 billion in 2021

This transaction serves as a prominent example of significant recent mergers within the media sector. Discovery Inc. successfully acquired the WarnerM

business for a sum of $43 billion. Through this deal, the companies have forged the most formidable media portfolio globally, encompassing entertainment, movies, and educational content under a single brand.

 

Acquisition example

Microsoft and Activision Blizzard, $68.7 billion

In early 2022, Microsoft declared its intentions to acquire Activision Blizzard, a prominent American video game provider. The estimated value of this acquisition stands at $68.7 billion. With this acquisition, Microsoft aims to enhance its expanding metaverse strategy and expedite the company's expansion in the gaming industry, encompassing consoles, PCs, and mobile devices.

US$6 billion acquisition of Credit Karma by Intuit

 

Intuit, renowned for its financial platform and popular software programs like TurboTax, QuickBooks, and Mint, made its largest-ever acquisition with the all-cash purchase of Credit Karma for US$6 billion.

While Intuit has a track record of acquiring companies, this recent deal stands out in terms of scale. Externally, the transaction appears highly favorable, as it allows Intuit to integrate Credit Karma, providing clients with a comprehensive set of personal finance tools.

 

Wrap Up

As businesses engage in mergers and acquisitions, the significance of a meticulous valuation process cannot be overstated. M&A valuation serves as the compass, guiding companies through the period of consolidations, ensuring strategic alignment, risk mitigation, and the creation of long-term value. Ultimately, a well-executed M&A valuation lays the foundation for informed decision-making, successful integrations, and sustained growth for businesses.