What is Mergers and Acquisition – Valuation

Mergers and Acquisition

Mergers and Acquisition: Are we better off buying a new capability, market entry, customer base, earning opportunity and so on, or attempting to build it ourselves? A company always revolves around such question when it has desire for expansion and growth.  Corporate restructuring can be considered, when there is expansion strategy is in place with company.

Mergers can be defined as combination of two or more companies into a single company where the survivor acquires assets as well as liabilities of merged companies and other loses their corporate existence. And Acquisition is purchase of one company of controlling interest in the share capital of another company.  Acquisition is basically but acquiring ownership in the property of others.

What is Mergers and Acquisition

Mergers and Acquisition: Objectives behind process

  • Economies at large scale: operating cost advantage is one of biggest motive behind any corporate restructuring. Due to higher level of operation the average cost can be reduced. In operational terms real economies may arise from the production activities, research and development activities, administrative activities like storage, transportation etc.
  • Improving revenues and hence profitability: Merged firm can have huge market share. So sales potential of new entity can improve due to expanded market.
  • Faster growth in scale and quicker time to market: Merger and acquisition can give wider market. It will give quick accessibility to new market. New need not to go for market research as one of the company has already established in that particular segment. No need of establishment of new plant and building.
  • Acquisition of new technology or competence: One of the important objectives behind mergers and acquisition is technology up gradation and achieving operational competency.
  • Elimination of competition: If there is Merger and Acquisition takes place within same line of industry. It cut down and reduces the competition. Thus it gives a larger market share to the new company.
  • Tax shield: there will be definitely tax befit in merger and acquisition deal. Tax benefit in the form of set-off and carry forward of losses. If there is any loss of target firm it set off and carried forward with acquiring firm.

Mergers and Acquisitions Analysis

The most common reason businesses seek a business valuation is for mergers and acquisitions. There are many M&A transactions every year. As of 2019, there were 49,849mergers and acquisitions globally and the number is still on the increase. As much as the transactions on M&A can be complicated and require some unique considerations, the valuation methods used are the same as the approaches applied in other businesses. The main 3 business valuation methods for M&A rely on the typical valuation approaches to mergers and acquisitions.

Evaluation of M&A involves the analysis of cases where a company wishes to purchase the common stock of another company in exchange for cash or its common stock. The new standard adopted by the Financial Standard Accounting Board (FSAB) which requires the use of the acquisition method of accounting for all M&A transactions treats M&A transactions as the buying of a particular company by another.

In essence, mergers and acquisitions are treated the same for accounting purposes although they technically represent two different kinds of transactions. Following the new adoption, the pooling of interest accounting method was used for transactions on mergers.

In merger analysis, the financial profile of a merger is analyzed with models after the two companies are combined. The aim is to determine if there will be an increase or decrease in the buyer’s earnings per share. Expected earnings with an increase are referred to as accretion while a decrease is called dilution. The type of merger or acquisition in accretion is known as an accretive acquisition and that of dilution is known as a dilutive acquisition.

It is improbable that the buyer’s shareholders will approve of a purchase that reduces the value of their shares, and it is for this same simple reason that accretive acquisitions are much more common. That a transaction is dilutive or accretive is a function of the purchase price for the target and also the number of shares put out to raise capital to fund the purchase

In building the M&A model, the key valuation data points include the following steps:

  • Making acquisition assumptions on financing.
  • Making projections about income based on income statements and valuation.
  • Combining and adding together the income statements, revenue, and operating expenses.
  • Calculating accretion or dilution.

The next steps that follow the creation of the model are the estimation of the cost of purchase, the calculation of the goodwill, and other adjustments on the balance sheet. These steps involve the use of one or more standard valuation approaches which would be best worked out by professional business valuation providers.

Types of Merger and acquisition

  • Horizontal  Merger
  • Vertical Merger
  • Conglomerate Merger

Horizontal merger

Horizontal merger involves two firms operating and competing in the same kind of business activity. This type of acquisition is also known as buying a market place. Motive behind horizontal merger is as follows.

  1. Elimination or reduction in competition
  2. Putting an end to price cutting
  3. Economies of scale in production
  4. Research and development
  5. Marketing and management.

Vertical merger

Vertical merger Vertical mergers or vertical integration happens when the acquiring firm buys buyers or sellers of goods and services to the company. In other words, a vertical merger is usually between a manufacturer and a supplier. Vertical mergers adopted by firm to increase efficiency along the supply chain which, in turn, increases profits for the acquiring company. It can occur in two ways. One when a firm acquires supplier it is known as backward integration or ‘Upstream’ from it.  When firm acquires customer, it is known as forward integration or ‘downstream’ from it.


  1. As there is integration with supplier there will be low buying cost of materials.
  2. Forward integration helps ready market which leads to lower distribution costs.
  3. Assured supplies and market. So Business operation does not get affected.
  4. Increasing or creating barriers to entry for potential competitors.
  5. Placing them at a cost disadvantage.

Conglomerate merger

Conglomerate merger represents a merger of firms engaged in unrelated lines of business.


In business valuation definition, valuing an acquisition involves the application of multiple analyses to determine possible price ranges for payment of an acquisition participant. There are several ways on how to get a business valuation done which can give out widely differing results, but this will depend on the basis of each method of valuation.

While other valuation methods which can generate much higher valuations focus on the intrinsic value of intellectual properties (properties that involves intangible creations of the human intellect) and the durability of a company’s brands, some are based on the assumption that a business will be sold off at a very high price that can lead to bankruptcy. Other valuation methods also lie in between these two extremes.

For complexity purposes, it is important to involve a business valuation company professional even in your private business valuation to ascertain a fair value for the purchase of the company which is to be acquired

Types of Conglomerate merger:

  • Product-extension mergers broaden the product lines of firms. These are mergers between firms in related business activities and may also be called concentric mergers.
    Ex: P&G acquires Gillette to expand its product offering in the household sector and smooth out fluctuations in earning.
  • A geographic market-extension merger involves two firms whose operations have been conducted in non overlapping geographic areas.
    Ex: Darden Inc, A chain of restaurants.

Pure conglomerate mergers involve unrelated business activities. These would not qualify as either product-extension or market extension. It allows a company to introduce new and different product and new territories to operate.


A conglomerate merger helps company to diversify in different line of business. This type of merger also helps a company to reduce its risk exposure. If one line of business does not do well at least other line of business can generate wealth.