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.