How to Price a Share for Acquisition

Abstract

Although take‐overs are becoming important means of diversification, there is no established technique which incorporates uncertainties involved and gives a range of values of a target firm which can form the basis for offering a price. Using a model of the firm's cash flows after acquisition, Malay Kanti Roy simulates the likely cash flow streams from the acquisition of India Cements for various values of the key variables such as growth rate and earnings before interest and taxes. He shows how such models and simulation analyses can help negotiators set upper and lower limits for a take-over bid.

Reengineering, crafting and comparing business valuation models – the advisory exemplar

“…There are various methods suggested by Western authors including: Tobin's q model (Tobin, 1969); diverse valuation models and results (Damodaran, 1996(Damodaran, , 2002Fernandez, 2002Fernandez, , 2003Fernandez, , 2007, assessment of valuation models (Levin and Olsson, 2000;Plenborg, 2002;Bailey et al, 2008); value relevance of accounting information (EI Shamy and Kayed, 2005;Misund et al, 2008), and estimating free cash flows (Velez-Pareja and Tham, 2010). Exclusive studies are: valuation of shares through simulation (Roy, 1986); valuation model for international acquisitions (Madura et al, 1991), valuation of hotels, property, and real estate (Hattersley, 1990;Graaskamp, 1992;Roubi, 2004), common errors in valuation (Fernandez and Bilan, 2007), psychology driven pricing in mergers (Baker et al, 2009), valuation of young companies (Zwilling, 2009), and comparison of NAV and NRR approach 1.0 (Nangia et al, 2011). Relevant studies include: relationship between corporate governance, board size, and valuation (Yermack, 1996;Bai et al, 2004); industrial diversification and firm value (Wilcox et al, 2001;Lin and Su, 2008); effect of cultural differences on firm value (Antia et al, 2007); impact of value drivers on firm value (Kazlauskienė and Christauskas, 2008), and the economic impact of mergers on firm value (Ma et al, 2011).…”

“…Interestingly, in an early study in India, Roy (1986) computed share price for acquisition by using an illustrious operations research technique "simulation" with respect to ITC -India Cements takeover. Results proved that estimating minimum and maximum tender offer price is possible through a simulation process.…”

“…In scientific literature, value is Business valuation models treated as the best valuation indicator of an enterprise performance, thus integrating the drivers and reflecting the internal situation, as well as the external environment (Kazlauskienė and Christauskas, 2008). Mainly, value plays a most important role in setting rational limits for negotiations (Roy, 1986). Further, deals are completed when both parties arrive at a win-win value (Allen and Rigby, 2003) and value always depends on expectations (Fernandez, 2002, p. 2).…”