Business valuations is one of if not the most tested topic in the ACCA exam.
One of the regular requirements that is asked is to ascertain the post acquisition value after the buyer takes over the seller company.
This blog uses two illustrations to show you how to ensure you understand what the examiner is looking for you to achieve.
Ritson & Sunson
Ritson (listed) plans to purchase Sunson (private co).
Ritson is valued at $10m
(number of issued shares x current list price)
Sunson has been valued at $2m
(one clear method specified in the Q from say PV of future FCFC – MV Debt , PV of Future FCFE, P/E etc).
Total Pre Acq’n = $12m
You are told a method to use:
PV of Combined FCFCo @ New WACC – MV Debt
PV of Combined FCFE @ New Ke
Combined PAT inc Synergies x New P/E ratio
End result value of equity is $14.25m
14.25 – 12 = $2.25m
Who gets what share of this ?
Question has to indicate like:
“Sunson will only sell for a 25% premium on current value”
So Sunson gets 25% x $2m = $0.5m
That leaves Ritson with $2.25m- $0.5m = $1.75. This is a % gain on their current value of $1.75/$10m = 17.5%.
The question specifies purchase consideration options
You evaluate each and show % gain to Sunson and Ritson as told.
Linus & Nalpak
Linus Co (online training co) wishes to purchase Nalpak (traditional training co).
Nalpak has been valued (method stated in the question) at $150m. However, they expect a minimum bid premium of 20%. Total price Linus will have to pay is
120% x $150m = $180m
Linus has a clear cut strategy.
1. They will close down the publishing arm of Nalpak. This has been valued using asset based method of NRV – Debts specified. Value comes to $25m.
2. The classroom course business is no longer wanted by Linus as this is old style training. They have agreed to sell this part of the business via a MBO. The P/E method of valuation using the profits of the classroom PAT leading to $75m
3. Nalpak’s online training business will be subsumed into Linus’s business. Nalpak’s future free cash flows from the online business have been forecast. The specified WACC has been to discount these cash flows. The relevant debt has been deducted. The value has come to $100m.
Hence, after Nalpak is taken over it’s value is now
25 + 75 + 100 = $200.
Value Added To Linus Co
So Linus pay 180 for a company they can make worth 200.
That’s value added $20m.