Thursday, March 12, 2015

Valuation in M&A - Reports from the Field

In teaching finance to MBAs, I stress an analytical approach to decision making and strive to give the students the latest tools of our field and to discuss the latest empirical and theoretical research.  But I also stress that 'People Make Decisions', not algorithms or analytical techniques.  Also, it is people who implement decisions.  Certainly, this is crucial in the field of mergers where integration remains one of the major concerns.  Finally, I note that there is an Art and a Science to finance.  We can teach the science, but the art is nuanced and requires a great intuitive grasp of the subject blended with experience.

Here is an interesting article on how practitioners are actually valuing companies in M&A transactions.  It makes the same points.  The authors interviewed investment bankers who confirm use of the techniques often discussed in these posts: discounted cash flow and comparable transactions.  The article also highlights the use of judgement in making these decisions, noting:

"While leading practitioners routinely use DCF methods in mergers and acquisitions (M&A) valuations, the application is often far from “routine”; it requires art and judgment in the face of inherently uncertain business forecasts such as those surrounding merger synergies. Our results serve as yet another reminder that analytic techniques such as DCF do not make decisions but only inform them."

From "Company Valuation in Mergers and Acquisitions: How is Discounted Cash Flow Applied by Leading Practitioners? by W. Todd Brotherson, Kenneth M. Eades, Robert S. Harris, and Robert C. Higgins"

All the best,


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