¥ An acquiring firm should pursue a merger only if it

creates some real economic values which may arise

from any source such as better and ensured supply of
raw materials, better access to capital market, better and
intensive distribution network, greater market share, tax
benefits etc.
¥ The financial evaluation of a target candidate,
therefore, includes the determination of the total
consideration as well as the form of payment, i.e., in
cash or securities of the acquiring firm.
Õ aluation based on assets.
Õ aluation based on earnings.
Õ Market value approach.
Õ Earnings per share.
Õ Share exchange ratio.
Õ Other methods of valuation.
ÕThe worth of the target firm, no doubt, depends upon
the tangible and intangible assets of the firm.
ÕThe value of a firm may be defined as:-
alue of all assets ± External Liabilities = Net Assets
ÕThe assets of firm may be valued on the basis of the
book values or realizable values
 n
 
 
Õn this case, the values of various assets given in the
latest balance sheet of the firm are taken as worth of
the assets.
ÕFrom the total of the book values of all the assets,
the amount of external liabilities is deducted to find
out the net worth of the firm.
ÕThe net worth may be divided by the number of
equity shares to find out the value per share of the
target firm.
 n this case, the current market prices or the realizable
values of all the tangible and intangible assets of the
target firm are estimated and from this the expected
external liabilities are deducted to find out the net
worth of the target firm.
 VALUATION BASED ON EARNINGS

Õ n the earnings based valuation, the PAT (Profit after taxes) is

multiplied by the Price ± Earnings ratio to find out the value.
—ARKET PRICE PER SHARE = EPS * PE RATIO
Õ The earnings based valuation can also be made in terms of
earnings yield as follows:-
EARNINGS YIELD = EPS/—PS *100
Õ Earnings valuation may also be found by capitalizing the total
earnings of the firm as follows:-
VALUE = EARNINGS/ CAPITALIZATION RATE * 100
 ¤
   

¥ This approach is based on the actual market price of

securities settled between the buyer and seller.
¥ The price of a security in the free market will be its
most appropriate value.
¥ Market price is affected by the factors like demand
and supply and position of money market.
¥ Market value is a device which can be readily applied
at any time.
ÕAccording to this approach, the value of a
prospective merger or acquisition is a function of
the impact of merger/acquisition on the earnings
per share.
ÕAs the market price per share is a function
(product) of EPS and Price- Earnings Ratio, the
future EPS will have an impact on the market value
of the firm.
 

 
ÕThe share exchange ratio is the number of shares that
the acquiring firm is willing to issue for each share of
the target firm.
ÕThe exchange ratio determines the way the synergy is
distributed between the shareholders of the merged
and the merging company.
ÕThe swap ratio also determines the control that each
group of shareholders will have over the combined
firm.
 ¤
   
ÕBASED ON EARNINGS PER SHARE (EPS)
Share Exchange Ratio = EPS of the target firm / EPS of
the Acquiring firm
ÕBASED ON —ARKET PRICE (—P)
Share Exchange Ratio = MP of the target firm¶s share /
MP of the Acquiring firm¶s share
ÕBASED ON BOOK VALUE (BV)
Share Exchange Ratio = B of share of the target firm /
B of share of the Acquiring firm
 O

OO

O

Õ ECONO—IC VALUE ADDED

EA is based upon the concept of economic return which refers to
excess of after tax return on capital employed over the cost of
capital employed.

Õ —ARKET VALUE ADDED

MA is another concept used to measure the performance and as a
measure of value of a firm. MA is determined by measuring the
total amount of funds that have been invested in the company
(based on cash flows) and comparing with the current market
value of the securities of the company.
Õash offer
ÕEquity share financing or exchange of shares
ÕDebt and preference share financing
ÕDeferred payment or earn ± out plan
ÕLeveraged buy-out
ÕTender offer
 n    ¤

ÕThe advantages of synergy of merger and the

resultant expectation of risk reduction may affect
both the acquiring firm and the target firm.
Õf synergy is perceived to exist in a takeover, the
value of a combines firm would be greater than the
sum of the values of the target firm and the acquiring
firm.
 (AT) >  (A) +  (B)