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