Valuation related to mergers and acquisitions usually follow these three methods. They are market based method, asset based method and income based method. It may be felt that the market based method is more relevant but all the three methods are significant depending on the situation prevailing during the course of the mergers as well as acquisitions.
Market based method:
Valuation related to mergers and acquisitions estimated by the market based method, compares various aspects of the target company with the same aspects of the other companies in the market. These companies (not the target company) usually possess a market value, which has been established previously. There are few things to be kept in mind prior to comparing the various aspects. Firstly, which factors need to be compared and secondly, which are the companies, which will serve as comparables. Public companies, belonging to similar industries ( of the target company) may be opted for as comparable. However, if the target company is not listed on the stock exchange or is comparatively smaller in size than the public companies, comparison with the public companies may not be of much help. In such cases, private as well as public databases are available, which are commercial in nature.The other aspects that need to be compared include book value and earnings or total revenue. Once all the data are collected, an extensive comparison is made to find the value of the target/subject company.
