Module XI·Article V·~2 min read
Valuation in M&A and Control Premium
M&A and Deal Structuring
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Valuation is the central issue in any M&A deal: how much is the target company worth and how much is the buyer willing to pay? In the M&A context, valuation is supplemented by specific concepts — the control premium, synergy value, and the bridge to equity value.
Valuation methods in M&A. DCF (Discounted Cash Flow): the standard method for determining value based on discounting future FCF. In M&A, DCF includes standalone value (the value without synergies) and synergy DCF (the NPV of synergies). The WACC for the target is calculated based on market data (betas, capital structure). Trading Comparables (Comps): EV/EBITDA, EV/Revenue, P/E of similar public companies. Provide a market valuation of the business but may not reflect the control premium. Transaction Comparables (Precedent Transactions): EV/EBITDA multiples in past M&A deals — already include the premium. Give a higher valuation base. LBO Analysis: the price a PE fund can afford at a target IRR of 20-25%. Sets the lower bound of the price for financial buyers. Football Field (valuation range diagram): visualization of all methods to understand the valuation range.
Control premium — an add-on to the market price of shares for obtaining control over the company. Historically: the control premium in M&A is 20-40% above the unaffected share price (unaffected share price — the price before announcement). Sources of the control premium: synergies (the buyer shares anticipated synergies with the target shareholders), benefits of managerial control (changing management, implementing strategic options), competitive pressure from the auction process.
Premium Analysis. Unaffected price — the share price before any leak of deal information (usually the price 30-60 days before the announcement). Premium to 52-week high — how much the deal pays relative to the annual high. Intrinsic value vs Offer Price — comparison to independent analyst valuation.
Bridge: Enterprise Value to Equity Value. EV = Enterprise Value (the value of the business to all capital holders). Equity Value = EV − Net Debt − Minorities − Preferred + Cash. Debt-like items (lease obligations, pension obligations, environmental liabilities) are subtracted from EV to obtain equity value. Cash-like items (excess cash, liquid investments) are added to equity value. Price per share = Equity Value / Fully Diluted Shares (including options and warrants).
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