Valuation for Mergers &

Acquisitions- Including
Case Studies
Ahemdabad Branch of WIRC of ICAI

- CA Parag Ved
August 3, 2013

Valuation Concept

Value Price

Valuation not an exact Science, More of Art and

Subjective assessment

Value varies with situations

Date specific

Merger/
Demerger

Purchase /
Sale of
Business

Private
Equity

Buyback of
Shares

IPO/ FPO

Why
Valuation?

Test of
Impairment/
IFRS

Litigation

Family
Separation

PPA

Regulatory
Approval

Portfolio Value
of Investments

Steps in Valuation

Obtaining information

Management Discussion and

Industry Overview

Data analysis and review

Selection of method

Applying Method

Conducting sensitivities on
assumptions

Assigning Weights

Recommendation

Reporting

Sources of Information

Historical data such as audited results

of the company

Future projections

Stock market quotations

Discussions with the management of

the company

Representation by the management

Data on comparable companies

Market surveys, news paper reports

Analysis of Company

SWOT Analysis

Profitability Analysis- Past and

vis--vis industry

Ratio Analysis

P&L Ratios


Expense & Profitability ratios

Balance Sheet Ratios



Quick Ratio/ Current Ratio

Turnover Ratios

Liquidity Ratios

Debt Equity- of Company &

Industry

Principal Methods of Valuation

Earning based approach
Discounted Cash Flow
Earnings Multiple Method

Market Approach
Market Price
Market Comparables

Asset Based Approach

Net Assets Method
Replacement Value/Realisable Value

Common Adjustments
Following adjustments may be called for:

Investments

Surplus Assets

Auditors Qualification

Preference Shares

ESOPs / Warrants

Contingent Liabilities/Assets

Tax concessions

Findings of Due Diligence Reviews

FDI In India - Revised Pricing Guidelines

As per RBI circular dated May 4, 20101) Transfer of shares by Resident to Non-resident (i.e. to foreign
national, NRI, FII and incorporated non-resident entity other than
erstwhile OCB)

In case of listed companies- the price shall not be less than the price at
which a preferential allotment of shares can be made under the SEBI
Guidelines

In case of unlisted companies - the price shall not be less than the fair
value to be determined by a SEBI registered Category I - Merchant
Banker or a Chartered Accountant as per the discounted free cash flow
method.
2) Transfer of shares by Non-resident (i.e. by incorporated non-resident
entity, erstwhile OCB, foreign national, NRI and FII) to Resident

The price shall not be more than the minimum price at which the transfer
of shares can be made from a resident to a non-resident as given above.

Discounted Cash Flow (DCF)

Considers Cash Flow and Not

Profits

Cash is King

Free Cash Flow (FCF)



FCF to Firm

FCF to Equity

DCF Parameters
Cash Flows

Projections

Horizon period

Growth rate

Discounting
 Cost of Equity
 Cost of Debt
 Weighted Average Cost of
Capital (WACC)

Cash Flows

Business
Plan
Business
Cycle
Capital
Expenditure

Working
Capital

Depreciation
Amortization

Tax

DCF - Projections
Factors to be considered for reviewing
projections:

Industry/Company Analysis

Dependence on single customer/ supplier

Installed capacity

Existing policy/ legal framework

Capital expenditure increasing capacities

Working capital requirements

Alternate scenarios / sensitivities

DCF Discounting
Weighted Average Cost of Capital (WACC)

D = Debt
E = Equity
Kd = Post tax cost of debt
Ke = Cost of equity

DCF - Terminal value

Terminal Value is the residual value of business at the
end of projection period used in discounted cash flow
method.
Terminal Value

Liquidation
Approach

Multiple
Approach

Stable Growth
Approach

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DCF An Example

Earnings Multiple Method

Commonly used Multiples
Price to Earnings
Multiple:

Market Cap/PAT

Enterprise Value
to EBITDA
Multiple:

Enterprise Value/EBITDA

Sales Multiple:

Enterprise Value/Sales

Enterprise Value/EBITDA Multiple Method

Determination of Maintainable EBIDTA

Capitalisation Rate/Multiple
Not affected by the pattern of Funding
adopted by Company/ Comparable
Companies

Enterprise Value/EBITDA Multiple Method

Based on
projections

past

Non-recurring
excluded

EBIDTA of various years are averaged

(simple or weighted). Current EBIDTA is
accorded the highest weight

Projected EBIDTA discounted for inflation

Finally appropriate multiple is applied to

arrive at the value

&

performance

and

extraordinary

/or
items

Multiples

Multiples to be applied represent the growth

prospects/ expectations of the Company

Factors to be considered while deciding the

multiple:


Past and Expected Growth of the Earnings

Performance vis--vis Peers

Size & Market Share

Historical Multiples enjoyed on the

Exchange by the Company and its peers

Stock

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EV/EBIDTA An Example

EV/EBIDTA An Example

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Market Price Approach

Evaluates the value on the basis of prices quoted on

the stock exchange

Thinly traded / Dormant Scrip Low Floating Stock

Significant and Unusual fluctuations in the Market Price

It is prudent to take weighted average of quoted

price for past 6 months

Regulatory bodies often consider market value as

important basis Preferential allotment, Buyback,
Takeover Code

Market Price Method An Example

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Market Comparables

Generally applied in case of unlisted

entities

Estimates value by relating an element

with underlying element of similar
listed companies.

Based on market multiples of

Comparable Companies


Book Value Multiples

Industry Specific Multiples

Multiples from Recent M&A Transactions.

NAV Formula
The Value as per Net Asset Method is arrived as follows:
Total Assets
(excluding Miscellaneous Expenditure and debit balance
in Profit & Loss Account)
Less: Total Liabilities
NET ASSET VALUE
OR
Share Capital
Add: Reserves
Less: Miscellaneous Expenditure
Less: Debit Balance in Profit & Loss Account
NET ASSET VALUE

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NAV An Example

Selection of Methods
Situation
Knowledge based companies
Manufacturing Companies

Approach

Earnings/Market
Earnings/ Market/ Asset

Brand Driven companies

Earnings/Market

A Matured company

Earnings/Market

Investment/Property companies

Asset

Company going for liquidation

Asset

Generally Market Approach is used in Combination

with other methods or as a cross check

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Reaching a Recommendation

Methods throw a range of values

Consider the relevance of each methodology

depending upon the purpose and premise of
valuation
Mathematical weightage
Professional judgment
Subjective Value

Fair Value

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Other Value Drivers

Final Value

Final Price is a result of negotiations

Documentation

Appointment Letter
 Purpose & Scope of Valuation
 Valuation Date
 Commonly used Methodologies
 Timelines
 Fees
 Limitations
Representation Letter
 No material omissions on part of the
management
 Confirmation of all inputs/ information used in
the valuation
 Responsibility for providing information lies
with Management

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Valuation Report

Introduction/ Background

Purpose of Valuation

Key Financials

Sources of Information

Methodologies of Valuation

Important consideration & assumptions

Valuation Workings

Fair Value Recommendation

Exclusions and Limitations

Case Study on Valuation

for Merger

17

Before Merger

Shareholders of X

Shareholders of Y

X Ltd

Y Ltd

35

After Merger
Option 1

Option 2

Option 3

Shareholders
of X & Y

Shareholders
of X & Y

Shareholders
of X & Y

X Ltd

Y Ltd

New Co. Z

Note- Based on the swap ratio, the shareholders of the transferor

company are issued shares of transferee company

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Exchange Ratio

The Exchange Ratio is simply

the number of Transferee Co.s
shares that are to be issued to
the shareholders of Transferor
Co. as consideration for the
merger

Depends upon the valuation

of businesses of the Transferor
and Transferee Companies

Exchange Ratio

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Case Laws
Exchange Ratio not disturbed by Courts unless objected
and found grossly unfair

Miheer H. Mafatlal Vs. Mafatlal Industries (1996) 87 Com
Cases 792

Dinesh

v. Lakhani Vs. Parke-Davis (India) Ltd. (2003) 47

SCL 80 (Bom)

Valuation will take into account number of factors such

as prospective yield, marketability, the general outlook for
the type of business of the company, etc. Mathematical
certainty is not demanded, nor indeed is it possible

Viscount Simon Bd in Gold Coast Selection Trust Ltd. vs.
Humphrey reported in 30 TC 209 (House of Lords)

Case Laws
It is fair to use combination of three well known methods asset value, yield value & market value

Hindustan Lever Employees Union Vs. HLL (1995) 83

Com. Case

30 SC
Valuation job must be entrusted to people who know the
Company rather than giving to outsiders who will start
from scratch

Consolidated Coffee V/s Arun Kumar Agrawal (1999) 21 SCL 11 (Kar)

Cont

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Some Issues

Relying on Technical Valuers Report

Joint Reports

Fairness Opinion by Merchant Bankers

Engagement Letter

Management Representations

Reporting

Valuation is not an
objective exercise.
Any preconceptions
and biases that an analyst
brings to the process will
find their way into the
value.

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