Paper Topic:

Mergers & Acquisitions

Valuation of the Target Firm

The valuation process is the step of looking for deal-killers ' It determines how accurate all the preliminary data gathering turns out to be . Do the financial statements accurately reflect the condition of the company ? Are there any irregularities about reporting or transactions Essentially , is the company what it represents itself as , or appears to be , and are there any skeletons in the closets ' that will present later problems

As insinuated here , the typical approach is aimed at very tangible fact finding , primarily with a financial emphasis

. What is often left out , of course , is any analysis about culture and people . In some cases , this is very conscious and intentional . If the only important assets of the target company are physical and financial , and it is irrelevant who actually runs the operations , then there is little else to be considered . If there is anything about the way the current business is operating , though , that makes any difference in its value , it is very short-sighted to ignore the human side

Valuation begins with an empowered valuation team that has the responsibility and authority to obtain information and analyze the data in to integrate them into a vision for the merger or acquisition Effective valuation goes beyond the financial numbers and inventories to include the culture , human resource attitudes , and other critical attributes that may affect the vision . Thus , one critical outcome of effective valuation is the assessment of the viability of the post-merger integration of the two firms

Clearly , an important part of the valuation process is analyzing the firm 's financial resources . This should include a return on assets per employee , economic value added , percentage of revenues and profits from new businesses , and a quantification of lost business revenues . Lost business revenues relate to missed business opportunities (e .g , beaten to the market by competitors , new product failures , etc

A valuation process also carefully and completely analyzes customer and marketing related issues . For example , customer relationships should be fully evaluated and detailed , a customer satisfaction index should be developed , and market share relative to competitors must be examined along with other characteristics such as the number of sales calls per customer

Another important area of valuation is the analysis of major processes (e .g , manufacturing , provision of service . This analysis may include measurements of cycle times and improvements over time , achievement of quality goals , assessment of the effectiveness of management information systems , and administrative expense per employee (overhead expense

Finally , an effective valuation process will also analyze the human resources of the firm . These analyses may be more qualitative and thus difficult to complete . Included may be an valuation of management capabilities , investment in human resources (e .g , amount of training per employee , and indices on leadership , motivation , and employee empowerment . Human capital is critical to the success of firms in general , but especially to mergers and acquisitions . The valuation team members are likely to specialize in different types of analyses However , the reports from...

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