Respond to at least two classmates by sharing whether you
agree or disagree with their views about the role of financial analysis
and how financial analysis is used in the decision-making process of a
merger and acquisition. Recommend additional elements that should be
included in your classmate’s explanation in order to create a more
complete picture of the financial analysis. 200 word for each reply

Student 1:

Several
financial analysis techniques exist for determining the “value” of a
target acquisition or merger company. Techniques such as, but not
limited to are:

Book Value – The net value that shareholders would receive based on current value of assets, liabilities and preferred stock.

Discounted
Cash Flows – a more complicated and detailed method that evaluates
historical cash flows and projects forward over a time period using a
discount rate to help determine present value.

Liquidation Value – Simple, sell everything and add up the proceeds.

The
one technique that has no real formula and can be harder to justify,
yet it is used quite often is “Strategic Value”. This is the monetary
value of a target company plus the projected value based on strategic
alignment of the two companies. Without hard number, this valuation
techniques must rely of hypotheticals and perception to determine the
final “cost of acquisition”.

When all valuations have been
applied, the maximum price a company should ever pay would be a price
where profitability and future returns are projected a non-profitable or
negative. The intrinsic value of a company will identify what the
current valuation models may reveal, but when a deal exceeds the dollar
amount determined by the future valuations of the proposal, the
acquiring company should exercise discipline and not pay more that it is
“worth”.

The risks involved with mergers and acquisition start with the

• Approach
  risks. This is the initial phase where everything and all resources are
  being used to place “value”. The techniques, communication and actual
  financial reports must be accurate. Any misunderstanding or
  misrepresentation can be costly.
• Transfer risks. Are appropriate
  resources and expertise being applied to the creation of the new
  company from the combination of the target and acquisition company.
• Execution
  risks. All phases of the new integration offer opportunity for the
  acquisition to go off plan. The proper use of an integration plan in
  support of a strategic plan must be the roadmap that offer contingencies
  in the event “things don’t go according to plan.”

I would
suggest the best way to finance an acquisition is the most profitable
and beneficial way for shareholders. Each M&A experience is unique.
However, I like using cash or company stock. It seems to be the most
straight forward and transparent. Initially, there will be no changes to
the acquiring company’s Income Statement. The Balance Sheet will
reflect the cost of the acquisition at the close and then cash flow and
earnings will be reflected as normal once the new company is formed
after the merger or acquisition.

Student 2:

There
are various business valuation techniques, and these evaluations
include the overall process of ascertaining an organization’s “economic
worth” (Miciuła et al., 2020). Business valuation is typically utilized
to discover a business’s average value for several reasons: acquisitions
and mergers, initiating partner ownership, and taxation. A few of the
different approaches include market capitalization, Times Revenue Method
and Discounted Cash Flow. Market capitalization is one of the more
straightforward business valuation approaches as it is computed by
multiplying the firm’s share prices by the aggregate amount of
outstanding shares, (Miciula, et al., 2020). The Times Revenue Method
takes the revenues produced across a specific time are applied to a
multiplier that is based on the industry that the firm is based on as
well as the economic surroundings (Miciuła et al., 2020). Discounted
Cash Flow, DCF, is the technique that utilizes historical cash flows to
determine present value. “To establish the maximum acceptable
acquisition price under the DCF approach, estimates are needed for the
incremental cash flows expected to be generated because of the
acquisition and the cost of capital,” (Rappaport, 1979).

Financial
analysis plays a significant role in the decision-making process of
mergers and acquisitions by providing stakeholders with the appropriate
resources to understand the industry, the company’s current position,
and what changes or improvements need to be implemented based on the
current position. There are several financial analysis techniques that
help financial managers in developing proposals for mergers and
acquisitions. First, the planning process starts with going through
corporate goals and marketing approaches and this analysis sets the
foundation for acquisition goals and criteria (Rappaport, 1979).
Secondly, the search and screen technique is also an essential financial
analysis technique, which includes the developing a catalog of
sufficient acquisition prospects. Such techniques are necessary for
financial managers to understand contenders and impacts of different
decisions. The acquiring company should compare analysis of the impacts
if the acquisition is financed by cash payment or through share
distribution. By analyzing cash or share payment, the acquiring company
is looking at the impact of the acquisition on the earnings per share
and capital structure on their company, while considering the minimum
acceptable rates of return.