Investing in M&A refers to short-term speculation with the purpose of obtaining equity or asset transfer premium instead of production and operation. The purpose of enterprise M&A is mainly to gain benefits from the market price changes of the acquired carrier. Speculation and paying attention to the value-added of the target company determine that the acquirer who invests in M&A only pays attention to the relationship between the present value of the future cash flow of the target company and the acquisition cost, thus determining that the value evaluation method of investing in M&A is essentially a common company value evaluation method in financial theory. The common methods are cash flow discount method and market method.
1. Cash flow discount method
The basic principle of discounted cash flow method is that the value of any asset is equal to the sum of the present value of all its future cash flows. Because the acquirer only holds the short-term equity of the acquired enterprise in investing in M&A, this method is mainly to evaluate the equity value of the acquired enterprise. The equity value of an enterprise is obtained by discounting the expected equity cash flow with the cost of equity capital. Expected equity cash flow is the cash flow after deducting all expenses of the enterprise, repaying principal and interest and all capital expenditures needed to maintain the predetermined cash flow growth rate; The cost of equity capital is the necessary investment return required by investors when investing in the equity of enterprises. After calculating the equity value of the acquired enterprise and comparing it with the M&A price, the acquisition behavior is beneficial only when the equity value of the acquired enterprise is greater than the M&A price. In addition, enterprises can also determine the optimal M&A scheme by comparing the discounted cash flow method values of various acquisition schemes.
2. Market rules
The market method, also known as the P/E ratio method or the income multiple method, is the reflection of the capital market on the capitalization of income, that is, the equity value of the company is equal to the expected earnings per share of the target enterprise multiplied by the future P/E ratio of the company. When using price-earnings ratio evaluation, historical price-earnings ratio, future price-earnings ratio and standard price-earnings ratio are generally used. The historical P/E ratio is equal to the ratio of the current market value of the stock to the income of the latest fiscal year; The future P/E ratio is equal to the ratio of the current market value of the stock to the expected annual income at the end of the current fiscal year; The standard P/E ratio refers to the similar P/E ratio of the target enterprise's industry. The price-earnings ratio method is widely used in evaluation, mainly because: firstly, it is an intuitive statistical ratio, which links the stock price with the company's current profitability; Secondly, for the stocks of most target companies, the P/E ratio is easy to calculate, which makes the comparison between stocks very simple. Of course, an important prerequisite for implementing the market law is that the stock of the target company should have an active trading market, so as to evaluate the independent value of the target company.
Second, the target company value evaluation method of strategic mergers and acquisitions
Strategic M&A refers to the M&A behavior of the acquirer, based on their respective core competitive advantages, by optimizing the allocation of resources, continuously strengthening the main business within a moderate range, generating integration synergy and creating new value greater than the sum of their independent values. Strategy M&A is based on the enterprise development strategy, emphasizing the core business services determined by the development strategy; After M&A, M&A enterprises and target enterprises can often obtain operating benefits greater than the sum of their profits before M&A, which is called synergy. Therefore, in the value evaluation of strategic M&A, we should not only use the individual evaluation method of the company value of the target company, but also further consider the value-added part generated by the synergy effect. That is, the value of the target company after the merger is:
Value of target company after merger = independent entity value+synergy value.
The value of the target company as an independent entity can be measured according to the value evaluation method under the above investment strategy, and the evaluation of synergy is the key to judge whether the merger is feasible and successful. However, the process of synergistic effect involves many uncertain factors such as market reaction and post-merger integration, and it is difficult to predict its value in detail, which is still a frontier topic in the field of financial research. This article will briefly introduce a common method.