Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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growthandriskareimpliedinthismarketprice,ratherthan
on finding undervalued or overvalued firms.


Valuation in Acquisition Analysis


Valuationshouldplaya centralpartofacquisitionanalysis.
Thebiddingfirmorindividualhastodecideonafairvalue
forthetargetfirmbeforemakingabid,andthetargetfirmhas
todetermineareasonablevalueforitselfbeforedecidingto
accept or reject the offer.


Therearespecial factorsto considerintakeover valuation.
First, there is synergy, the increase in value that many
managers foresee as occurring after mergers because the
combinedfirmisabletoaccomplishthingsthattheindividual
firmscouldnot.Theeffectsofsynergyonthecombinedvalue
of the two firms (target plus bidding firm) have to be
consideredbeforeadecisionismadeonthebid.Second,the
value of control, which measures the effects on value of
changingmanagementandrestructuringthetargetfirm,will
havetobetakenintoaccountindecidingonafairprice.This
is of particular concern in hostile takeovers.


Aswenotedearlier,thereisasignificantproblemwithbiasin
takeovervaluations.Targetfirmsmaybeoverlyoptimisticin
estimatingvalue,especiallywhenthetakeoverishostile,and
theyaretryingtoconvincetheirstockholdersthattheoffer
priceistoolow.Similarly,ifthebiddingfirmhasdecided,for
strategicreasons,todoan acquisition,theremaybe strong
pressureontheanalysttocomeupwithanestimateofvalue
that backs up the acquisition price.


Valuation in Corporate Finance

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