Acquisition? What’s Your Company’s Valuation?

 

Fair Price Versus Affordability

Most large strategic buyers have well-developed organizations and practices related to acquisition finance and valuation. They’re experts at determining the “fair value” of potential targets using traditional methodologies such as discounted cash flow analysis, comparable company and/or transaction analysis, and asset-based valuation.

When a company’s value is difficult to determine because of its size or lack of profitability, these companies seek to understand the capital structure of a company and the different levels of financing that it’s received to determine the price at which investors might have an interest in selling.

Ultimately, though, strategic buyers make decisions about how much they can afford to pay a company largely based on the anticipated performance of the business combination, estimating the Incremental cash flows that arise from increased sales of products and services as well as any anticipated cost savings due to the combination. Presenting the seller’s view of both during the sales process helps establish a more aggressive starting point for the discussion.

While acquiring, company executives tend to approach revenue and cost synergy estimates very conservatively due to the fact that they have the subsequent responsibility to deliver on these. Selling company executives and principals tend to be overly optimistic and discount the fact that any acquisition is accompanied by substantial execution risk.

The Bottom Line

To come to a mutually beneficial outcome, a realistic and constructive conversation around the combined entity value proposition and how to mitigate the risks that will certainly present themselves in the execution is essential. Remember that buyers look at both “desirability” and “affordability” to come to a conclusion about whether they should purchase and that it pays to educate them on both fronts.

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Partnerships, Strategic and Commercial Benefits

Elias Mendoza
Elias Mendoza
Elias Mendoza is Partner & Chief Operating Officer at Siris Capital, Corporation. In addition to COO, Elias’ responsibilities at Siris include identifying and evaluating trends within existing and potential industry verticals for investment opportunities, and assisting our Executive Partners in evaluating underlying business strategies of targeted companies and existing portfolio companies. Prior to joining Siris, he was a Partner at Union Square Advisors, where he served as its Chief Operating Officer and a senior banker across the firm’s verticals. Through July 2011, Elias held various senior positions at IBM, including Vice President and Global Head of Corporate Development. In such capacity, he was responsible for identifying , executing and integrating all acquisitions, investments and divestitures for the company on a worldwide basis. Elias’ previous experience includes over twelve years spent at Morgan Stanley & Co., most recently as an Executive Director in the Investment Banking Division. He received a Landegger Program Certificate in International Business Diplomacy and an MBA from Georgetown University. He received his AB from Princeton University.

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