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Valuation Techniques
Market based methodologies Intrinsic valuation measures
Dividend Valuation
Valuation approach based on capitalising the dividend streams received by an investor and expected growth thereof Mostly used for pure investments where the primary value driver is the dividend stream . therefore methodology is typically used when valuing Minority Shareholdings Value seen as net present value of future dividend streams
Some exercise
Trailing and forward multiples Outliers
DCF Approach
Valuation approach based on discounting projected cashflows to todays values By far, the most common methodology and used where the conditions for using capitalised earnings cannot be met i.e
erratic cash flow patterns
abnormal (irregular) growth patterns large variations in capex or working capital expected significant variations in gearing structure asset valued has a finite life
DCF Approach
DCF approach is based on FCF cash flow available to debt and equity investors EBITDA = Taxation (unlevered) Capital Expenditure Free Cash Flow +/- Changes in working capital
Relative valuation
M&A
Mergers
Type of mergers: Mergers appear in three forms, based on the competitive relationships between the merging parties. In a horizontal merger, one firm acquires another firm that produces and sells an identical or similar product in the same geographic area and thereby eliminates competition between the two firms. In a VERTICAL MERGER, one firm acquires either a customer or a supplier. In a Conglomerate mergers encompass all other acquisitions, including: - pure conglomerate transactions where the merging parties have no evident relationship (e.g., when a shoe producer buys an appliance manufacturer), - geographic extension mergers, where the buyer makes the same product as the target firm but does so in a different geographic market (e.g., when a baker in Chicago buys a bakery in Miami), and - product-extension mergers, where a firm that produces one product buys a firm that makes a different product that requires the application of similar manufacturing or marketing techniques (e.g., when a producer of household detergents buys a producer of liquid bleach). Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company.
Synergy
It is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.
Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.
Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
Regulatory issues
Closing the deal sha & spa, exchange of money or stock
Regulatory Issues
MRTP: Monopolies and Restrictive Trade Practices Act - Historically, competition in India has been regulated by the MRTP Act, which is in force since 1970. The primary purpose of the MRTP Act is to curb unfair, restrictive and monopolistic practices - However, to promote competition and to promulgate a modern competition law, Government constituted a committee in 1999, based on the recommendations of which, the Competition Act, 2002 was enacted and notified in January 2003 and the Competition (Amendment) Act, 2007 was enacted in September 2007. - The Competition Commission of India was established in October 2003 under the Competition Act, 2002. I