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Valuation for Mergers and Acquisitions, 2nd Edition

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Valuation for Mergers and Acquisitions, 2nd Edition


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Concise, focused, practical, up-to-date financial advice for valuation of companies in potential mergers, acquisitions, and restructurings.

  • Guidance on accounting, tax issues, and avoiding common errors that cause incorrect valuations
  • Covers discounted cash flow analysis, earnings multiples analysis, adjusted present value analysis, economic value analysis, and real option analysis, the accounting structure of a deal, accounting for goodwill, and more
  • Contains brief, up-to-date real-world examples and case studies


  • Copyright 2013
  • Dimensions: 6" x 9"
  • Pages: 256
  • Edition: 2nd
  • Book
  • ISBN-10: 0-13-337267-7
  • ISBN-13: 978-0-13-337267-0

Master the latest insights, lessons, and best practice techniques for accurately valuing companies for potential mergers, acquisitions, and restructurings. Concise, realistic, and easy to use, Valuation for Mergers and Acquisitions, Second Edition has been fully updated to reflect the field's latest and most useful "rules of thumb," compare every modern approach to valuation, offering practical solutions for today's most complex and important valuation challenges. Treating valuation as both an art and a science, it covers the entire process, offering up-to-the-minute real-world advice, examples, and case studies. Leading valuation experts Barbara S. Petitt and Kenneth R. Ferris introduce and compare leading techniques including discounted cash flow analysis, earnings multiples analysis, adjusted present value analysis, economic value analysis, and real option analysis. They fully address related concerns such as the accounting structure of deals, accounting for goodwill, tax considerations, and more. Throughout, they identify common errors that lead to inaccurate valuation, and show how to avoid them. From start to finish, this guide doesn't just make valuation comprehensible: it provides the tools and insight to make valuation work.

For all financial professionals concerned with valuation, especially those involved in potential mergers, acquisitions, and restructurings; and for corporate finance instructors and students in Executive MBA programs concerned with valuation.

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Valuation for Mergers and Acquistions: An Overview

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Table of Contents

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 Statement Transformations: Forecasting Permanent Earnings and Free Cash Flows     185
   2.1 Recurring and Nonrecurring Events     185
   2.2 Revenue Recognition Policy     186
   2.3 Inventory Costing Policy     190
   2.4 Depreciation Policy     193
3 Balance Sheet Transformations: Forecasting the Equity Value of a Company     195
    3.1 Asset Capitalization Policy     196
   3.2 Asset Revaluation Policy     199
   3.3 Off-Balance-Sheet Debt     200
4 Cash Flow Statement Transformations: Forecasting CFFO and Free Cash Flow     205
Summary     206
Endnotes     208

Chapter 6  Financial Reporting and Tax Considerations for Mergers and Acquisitions     211
Market View     211
1 Financial Reporting: To Combine or Not to Combine?     213
2 Consolidated Financial Reporting: Purchase Accounting      214
3 Noncontrolling Interest      218
4 Accounting for Goodwill     220
5 Tax Considerations of Mergers and Acquisitions     222
6 Tax Considerations of Goodwill     224
Summary     225
Endnotes     225

Chapter 7  Some Final Thoughts     229
Market View     229
1 Valuation: A Debriefing      230
2 Some Caveats to Consider     231
3 Closure     233
Endnote.     233

Bibliography     235
Index     239


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