Value a Target Company

Summaries

1. Discounted Cash Flow Analysis

Free Cash Flow for Firm (FCFF)

= Net income + Non-cash charges + Interest x (1-t) – fixed capital investment – net working capital investment

*** This is different from the FCF

= Net income + non-cash charges – changes in working capital – capital expenditure (*** interest is included)

(net working capital = current asset (excluding cash) – current liability (excluding short term debt)

Find the FCFF for every projected year on a pro forma forecast basis and discount to the present value.

2. Comparable Company Analysis

3. Comparable Transaction Analysis

Value after merger:

V_T = V_1 + V_2 + Synergy – Cost

Gain of target = Cost – market price (V_2)= premium

Gain of parent = Synergy – premium

Winner’s Cruse – Winner of a bid loses because of paying too high a premium

Downsizing:

Divestitures: selling part of the company

Equity carve-outs – create a new independent company, new shares issued

Spin-offs – similar to equity carve-outs, but no new shares issued

Split-offs – share holders receive shares of the new company by giving up that of the old one

Liquidations – break up the firm

Reverse synergy: partial values more than the whole