Costs of Mergers and Acquisitions

Abstract:

Costs of Mergers and Acquisitions are calculated in order to check to the viability and profitability of any Merger or Acquisition deal.

The different methods adopted for this cost calculation are the Replacement Cost Method, Discounted Cash Flow Method and Comparative Ratio calculation method. Costs of Mergers and Acquisitions are very much important as it determines the viability of any Merger or Acquisition. Any company finalizes a merger deal only after calculating the cost of merger. In case of acquisition, when a company buys out another firm, it calculates the costs in order to determine how beneficial will be the takeover. In order to calculate the cost of Mergers and Acquisitions, proper valuation of the target company. It is very natural that the target company tries to project its value to a high level but the firm who wants to take over the target company wants the deal to settled at a low price. So, the ultimate cost of the Acquisition depends on the price of the target company.

In the overall cost calculation of Acquisition, the Replacement Costs are something very crucial. In many cases, the Replacement Costs determine whether the Acquisition will ultimately take place or not.

Replacement Costs actually refers to the cost of replacing the target firm. Generally, Target company's value is calculated by adding the value of all the equipments, machinery and the costs of salary payments to the employees. So, the company which wishes to acquire the target firm, offers price accounting to this value. But, if the target firm does not agree on the price offered, then the other firm can create a competitor firm with same costing. So, this idea of cost calculation is referred as the calculation of Replacement Cost. But, it should be mentioned here that, in case of the firms, where the main assets are not equipments and machinery, but people and their skills, this type of cost calculation is not possible.

Other than this Replacement Cost calculation method, the other methods that are followed in calculating Costs of Mergers and Acquisitions, are the methods of Discounted Cash Flow Method and Comparative Ratio calculation Method. In Discounted Cash Flow Method, weighted average costs of capital are calculated, while in Comparative Ratio calculation method, Price- Earnings Ratio and Enterprise Value to Sales Ratio are calculated.