Valuation for Mergers and Acquisitions

Preface vii Chapter 1 Valuation: An Overview 1 Market View 1 1 Why Companies Merge or Acquire: A Historical Perspective 3 1.1 Mergers and Acquisitions Waves 3 1.2 Motivations for Mergers and Acquisitions 6 2 Do Mergers and Acquisitions Create Shareholder Value? 8 3 Merger and Acquisition Premiums 9 4 Valuation Process 10 5 Valuation Methods: An Overview 12 5.1 Relative Valuation Methods 14 5.2 Direct Valuation Methods 17 5.3 The Use of Valuation Methods 19 Summary 20 Endnotes 20 Chapter 2 Financial Review and Pro Forma Analysis 23 Market View 23 1 Financial Review 25 1.1 Ratio Analysis 26 1.2 Decomposition Analysis 32 1.3 Cash Flow Analysis 42 2 Pro Forma Analysis 49 2.1 Pro Forma Financial Statements 49 2.2 Sensitivity, Scenario, and Monte Carlo Simulation Analyses 59 Summary 60 Endnotes 61 Appendix 2A: Mattel's Financial Statements 66 Appendix 2B: Preparation of a Cash Flow Statement... 69 Cash Flow Fundamentals 69 Summary 81 Appendix 2C: Account Forecasting Alternatives 82 Chapter 3 Traditional Valuation Methods 85 Market View 85 1 Earnings Multiples 87 2 Discounted Cash Flow Models 92 2.1 Operational Dilemmas 92 2.2 Estimating the Entity Value and Equity Value 104 2.3 A Survey of Best Practices 108 2.4 Cross-Border Considerations 109 2.5 Illustration 111 Summary 118 Endnotes 119 Appendix 3: Some Frequently Asked Questions and Answers About the Free Cash Flow to the Firm Model and Earnings Multiples 124 Chapter 4 Alternative Valuation Methods 133 Market View 133 1 Relative Valuation Methods 136 1.1 Price Multiples 136 1.2 Enterprise Value Multiples 141 2 Direct Valuation Methods 144 2.1 Discounted Cash Flow Models 144 2.2 Economic Income Models 158 2.3 Real Option Analysis 165 Summary 170 Endnotes 171 Appendix 4: How to Use the Black-Scholes Model to Value a Red Option 176 Black-Scholes Model 177 Luehrman's NPVq/Cumulative Volatility Approach 178 Chapter 5 Accounting Dilemmas in Valuation Analysis 181 Market View 181 1 Assessing Economic Reality 183 2 Income

Barbara S. Petitt, PhD, CFA, is Director, Curriculum Projects, EMEA at CFA Institute. She has an in-depth knowledge of equity valuation, mergers, acquisitions, and corporate restructurings. She has held academic positions at Thunderbird, School of Global Management in the U.S., Bournemouth University in the U.K., and SKEMA Business School in France, and consulted with corporate clients throughout Europe and North America. Petitt resides in Poole, U.K. Kenneth R. Ferris, a valuation and acquisition consultant to small and mid-cap companies in Central America, served on the faculty at Northwestern's Kellogg School of Management; SMU's Cox School of Business; Thunderbird School of Global Management; Drucker School of Business at Claremont Graduate School, and Arizona State's W.P. Carey School of Business. He was a director for three NYSE-listed firms. Ferris resides in Placencia, Belize. Valuation for Mergers and Acquisitions 9780133372670 Front Matter, pg 1