Professional Documents
Culture Documents
By Sudha Agarwal
Chartered Accountant
Contents
Cash:
This method is generally considered suitable for relatively small
acquisitions.
It has two advantages: (i) the buyer retains total control as the
shareholders in the selling company are completely bought out, and
(ii) the value of the bid is known and the process is simple.
Share exchange:
The method of payment in large transactions is predominantly stock
for stock
The advantage of this method is that the acquirer does not part with
cash and does not increase the financial risk by raising new debt
The disadvantage is that the acquirer’s shareholders will have to share
future prosperity with those of the acquired company
Accounting for M&A
Cultural factors –
Corporate culture is defined by an organization’s values,
traditions, norms, beliefs and behavior patterns
The organization must move towards cultural
congruence, and also learn to manage diversity.
Implementation difficulties -
Speed is everything in the integration process.
Private-equity investors typically develop 120-day plans.
These are detailed plans that explain how management
teams are going to be integrated, what the operating
metrics are going to be, how management will be
measured, and what changes need to be made.
Major reasons why M&A fail
Relief-from-royalty –
used to value trade names and trademarks.
value of an asset is equal to all future royalties that would
have to be paid for the right to use the asset if it were not
acquired
Valuation of Intangibles
Comparable Transactions -
to value marketing-related intangible assets.
The value of an asset is based on actual prices paid for assets with
functional or technical attributes similar to the subject asset.
Using this data, relevant market multiples or ratios of the total
purchase price paid are developed and applied
to the subject asset
Avoided cost –
useful method to value technology
It is based on historical data, and does not rely on the subjective
assumptions employed under the other methodologies
the value of an asset is based on calculating the costs avoided by
the acquiring company when obtaining a pre-existing, fully functional
asset rather than incurring the costs to build or assemble the asset
The savings realized may include actual and opportunity costs
associated with avoided productivity losses.
Valuation of Brand
The brand is a special intangible that in many businesses is the most
important asset. This is because of the economic impact that brands
have.
There are two broad approaches to Brand Valuation:
1) Cost-based approach: Defines the value of a brand as the
aggregation of all historic costs incurred or replacement costs
required in bringing the brand to its current state.
The unwritten off amount of the branding related expenses is
the Brand Value
2) Comparable to generic company:
a. Arrive at a value for a brand on the basis of something
comparable
b. Difficult - as by definition brands should be differentiated
c. The value creation of brands in the same category can be very
different, even if most other aspects such as target groups,
advertising spend, price promotions and distribution
channel are similar or identical
Valuation of Brand
e. Some models add behavioral measures such as market share
and relative price
f. These approaches do not differentiate between the effects of other
influential factors such as R&D and design and the brand