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 VERNIMMEN.COM
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Summary of chapter 40 : Valuation |
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To the financial manager, the market for corporate control is nothing but a segment of the broader capital market. From this principle it follows that there is no such thing as control value other than the strategic value deriving from synergies.
Industrial synergies generally make a company’s strategic value higher than its financial or stand-alone value. The essence of negotiation lies determining how the strategic value pie will be divided between the buyer and the seller, with both parties trying, not surprisingly, to obtain the largest possible share.
The value of a company’s equity capital is the difference between the enterprise value (value of the invested capital) and the value of its net debt.
The first company valuation method, discounting of free cash flow, or DCF, is based on the notion that the value of the company is equal to the amount of free, after-tax cash flows generated by the company and discounted at a rate commensurate with its risk profile. The discount rate applied is the weighted average cost of capital (WACC). The DCF calculation is performed as follows: – the flow of free, after-tax cash flows is discounted over the explicit forecast period, i.e. the period over which there is visibility on the company’s operations; – a discounted terminal value is calculated on the basis of an estimated growth rate carried to infinity; – the value of equity capital is the difference between the value of the company obtained above and the value of the company’s debt.
The peer-group or multiples method is a comparative approach that sets the company to be valued off against other companies in the same sector. In this approach, the enterprise value of the company is estimated via a multiple of its profit-generating capacity before interest expense. The EBIT and EBITDA multiples are among those commonly used. The multiple used in the comparison can be either a market multiple or a transaction multiple.
The sum-of-the-parts method of valuation consists in valuing each of the company’s assets and commitments separately, then subtracting the latter from the former. There are several types of restated net value, from liquidation value to going-concern value, and there are important tax considerations. Either capital gains or losses will be subject to tax or depreciable assets will be undervalued and yearly taxes higher. Calculating restated net asset value makes sense only if it includes the company’s intangible assets, which can be particularly difficult to value.
No company valuation is complete without an analysis of the reasons for the differences in the results obtained by the various valuation methods. These differences give rise to decisions of financial engineering and evolve throughout the life of the company.
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