A merger, when two or more companies are combined into one company, is different from an acquisition, in which one company purchases, or takes over, the assets of another. In the case of an acquisition, the purpose of the valuation is to determine the value of the company (the purchase price), while in the case of a merger, a valuation is needed to determine the contribution or exchange ratio of the merger partners.In other words, which party gets what percentage of the shares after the merger?
There are two main differences in merger and acquisition valuation:
In the case of a merger, the two merging companies need to be valued, whereas in the case of a takeover, only the company that is acquired.
In the case of a merger, valuations are used to determine the merger ratio.
In contrast to the acquisition or sale valuation which gives an absolute value (fair price), merger valuation is a relative valuation, (the two merger partners are compared in terms value).
A crucial factor in pre-merger valuation is that the valuations of the merging
companies are comparable. It’s not only a question of applying the same valuation method, also the financial figures and forecasts of future cash flows should be taken into consideration. This requires an additional step in the valuation process. Do the companies have a similar earnings model? What stock valuation method do they use? Do they own their production equipment or lease it? Are the historical figures comparable?
What we do for you
We make sure these differences are transparent, so we are not comparing like with unlike. We also explore the differences in value drivers across the two companies. This input is not only used for valuation purposes, but also provided to the merging parties so that it may be used in the strategy of the newly merged company.