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Mergers and acquisitions (M&A) are among the important business decisions that company CEOs are expected to make in the process of making their companies profitable. However, it is important to analyze several factors that can influence the rationale for implementation of mergers and acquisitions between two companies. Among these factors is the historical analysis of the two companies to ascertain the past performance of each company and thereby have a clear glimpse of the driving force behind each company’s performance. The other factor that is essential in finalizing M&A is the valuation of the performance forecast which will help the management of the company that wishes to merge with the other. This forecast will help in ascertaining future financial performance of the resultant company. Similarly, it is advisable that an intensive and extensive estimate of cost of capital is done with a view of determining the weighted average costs in terms of capital that each company is going to incur in the entire process. This is a very important consideration because it will reveal the loopholes in financial forecasts and also may help to identify the areas where discounts on the free cash flows exist.
Having the exact and unbiased value of each company is an important step in M&A. this can be done through value assessment to ascertain the market worthiness of the other company. Additionally, it is important to have credible estimates of terminal value which are based on sound accounting standards so that the management is able to have a clear and verified forecast which will encompass the period beyond the actual forecast period. This is especially important where one company is facing financial or operational constraints which might be vivid to the management of the company merging with or acquiring the other. It is also advisable for management of the two companies to have a complete analysis of the market share and market valuation of the two companies which thereafter forms the basis on which premium will be based. This will avoid arbitrary allocation of stock prices or the prices of each share thereby affecting the profitability of the final company. Complete analysis is especially important where approaches to cost, market, and income of each company. Moreover, issues of multiple pricing must be outlined during the valuation exercise through industry wide consolidation and involvement of experts in the general process. This will ensure that the valuation pricing of stocks and shares in the company being acquired is realistic and in tandem with the existing conditions in the industry.
Long term growth rates
It is important to consider the long term growth rates that the resultant company is aiming to achieve. Such consideration will include the prevailing economic situations, the legal and administrative solutions, the level of interest rates as well as the non-economic factors such as social, technological, and political situations prevailing at the time of merging. All these factors will impact on the long term growth rate of the company. The management of the two companies must therefore give credit to the prevailing internal and external conditions which are likely to exaggerate the real financial situation of each company and therefore lead to unrealistic financial statements on the two companies. Similarly, it is important to evaluate the role of due diligence in the systematic process of evaluating and understanding the financial standing of each company.
Perception of value
The value that the company will get from the M&A process is important. This includes among other benefits the synchronization of management skills, synergizing skills and knowledge, enhancement of due diligence which is important in unraveling the issues involving the operational, technical, and financial aspects. Analysis of due diligence in executing M&A can help in identifying risks which would otherwise be overlooked including more sensitive issues such as unpaid taxes, fines, risks associated with the management structure of the company, and the general state of the company’s assets and human resource.
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I recommend that prior evaluation and analysis of the prevailing factors be diligently carried out before assigning any premium price to be awarded to the company. Specifically, this is recommended because it is important for the CEO to examine and understand the entire process as it can lead to issues such as termination of the M&A process, revision and adjustment of valuation estimates, or making of important decisions with regard to the entire process of acquiring the business. Finally, it is important that the CEO involves the valuation experts in the entire M&A process of merging to give advice on the viability of acquiring another business entity as a given premium.