Recent Acquisition
How would you value a company that made a major acquisition a few weeks prior to the date of a valuation?
Background Info
The acquirer was about three times larger than the target. The companies were competitors, with similar margins and growth prospects. The transaction was at arm’s-length.
The interest to be valued is a noncontrolling ownership interest in the acquirer. The standard of value is fair market value with a going concern premise of value.
Possible Approaches
One option is to prepare a pro forma analysis combining the acquirer and target business.
A second option is to analyze the acquirer’s past results on a stand-alone basis; then, add the amount paid for the target business to the indicated value.
Finally, one could apply pricing multiples from the acquisition to the acquirer or the combined business. Adjustments may be necessary for differences in size and risk.
In reconciling the values, adjustments for lack of control and/or marketability of the subject interest may also be necessary.
Question
In a case like this, does the price paid for the target business say as much about the value of the acquirer than anything else does?
Tags: Acquisition, Valuation Approaches, Value
July 25th, 2009 at 7:22 pm
The price paid is just the symptom. You need to get to the underlying disease, so to speak. In other words, the price paid is the “what.” You need to know the “why”–the process, personalities, motivations, and culture that gave rise to that price. You also don’t say whether the purchase price allocation was done under SFAS 141 or 141(R). That matters in terms of the probability of a future Goodwill impairment.
You also said nothing about the competitive domain, its growth rate, or the pre-acquisition domain-level market shares of the two entities. And you were silent on whether the two entities’ growth rates were greater than, about the same as, or less than the domain’s and, in a larger context, the industry itself.
You are also silent on the important question of whether the acquirer has done acquisitions before. If not, then, right at the outset, I think the odds are strongly against this one being successful, success being defined as wealth-enhancing to the shareholders. If it has done other deals, how have those turned out? What was the retention rate on key people staying with the target post-acquisition?
Beyond those thoughts, I think you’re asking the wrong questions here. Depending on how one defines key terms, the empirical evidence suggests that something over 3/4 of acquired companies fail to earn back their cost of capital. In other words, 3/4 of acquisitions reduce shareholder wealth in the acquiring company. We’re measuring that in economics terms, not accounting ones, of course.
In addition, you are silent on what the motivation for the acquisition was. Perhaps the target had a nifty internal technology. Or maybe it had some customers that the acquirer couldn’t pry away. Or maybe, just maybe, there was a potential successor in the target to the guy/gal running the acquirer.
You also said nothing about deal structure. Was it cash or stock? Was there any funded debt used? If so, how much? If not, why not? Was there an earn-out of any kind? I could go on, but you get the drift.
Saying that the acquirer is “three times larger,” which means 4 times AS big, doesn’t say anything about the actual size of the buyer. A $4 million company buying a firm with $1 million in revenues is a very different kettle of fish from a $200 million enterprise absorbing a target with annual sales of $50 million. Of course, you didn’t say how you were measuring size, either. Maybe it was headcount. Maybe it was EBIT. Who knows, Brian?
Finally, you made no mention of the cultures, values, and vision of the two entities. In terms of post-merger integration, culture matters more than anything else. Case in point: AOL’s purchase of Time-Warner. The T-W employees rose up en masse and refused to use AOL software, esp. its e-mail system. Right then, savvy observers knew there was going to be major trouble for a deal that, at the time (as it were), appeared grossly overpriced.
I could go on, but you get the picture. I think the questions are short-sighted and simplistic. We don’t need to know ALL of the nitty-gritty details, but, in order for a response to the two questions you asked to be anything more than a SWAG, we need a whole lot more information than you have parted with so far. But you might not have realized that when you posed the questions. This is about a whole lot more than numbers, man.
July 26th, 2009 at 2:59 pm
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