Respond to at least two classmates. Compare the approaches explained by your classmate to those you chose for your initial post. Explain whether you agree or disagree with what your classmate has identified in his or her best practices and/or practical approaches list, and provide a rationale for your statements by citing evidence from your sources.

Classmate 1:

One approach used by leading companies to deal with the critical issue of mergers and acquisitions and to value the target company is the Net Assets Valuation Method. These assets and liabilities within the financial statements are adjusted in many ways, including over or under-depreciation of fixed assets, minimizing inventory, and recovering accounts receivables. A net realizable value of the company is the result of this method, which is considered as the maximum price valuation of the target. Companies then understand the tax consequences of the transaction by providing a value of the net assets with the consideration of those paid to calculate the exact amount of capital gains to be taxed. Based on the net assets of the target, the acquiring company can determine the best combination of financing strategies to be used for the acquisition to minimize the prospective tax and interest implications for the combined entity.

Another practice is the income approach, also known as the Discounted Cashflow Method. The free cash flows of the target company are calculated for the future years based on the prospective growth rates of its revenues and expenses. These future cash flows are then discounted using the appropriate cost of capital to be used to finance the acquisition. The exact purchase price for the target company is calculated based on the future earnings of the entity without any under or overvaluation of the purchase price. The tax consequences of the transaction are considered if there are any carried forward losses of the target company that can be used by the combined entity to minimize the tax expenses. As the discount rate to be used for valuation depends upon the type of finance and its respective cost, (Brotherson, et al., 2014). So, the approach lets the acquiring company finalize the most beneficial financing strategy to be used for the acquisition to maximize the return of the transaction.

The synergies approach is another method used because the primary purpose of mergers and acquisitions is to gain synergies in the companies’ operations that are reflected in the profits of the combined entity. In this method, the effect of synergies is reflected in the target company’s valuation in the form of enhanced cash flows and cost reductions, which determines the maximum price of the target company. It also helps in mitigation of future tax consequences by using transfer pricing techniques and over or undervaluation of the purchase price and incorporating synergies into the valuation. This method also helps decide the type of finance to be used that would be beneficial in terms of tax reduction and interest cost reduction for the combined entity, (Berk, et al., 2014).

Classmate 2:

Microsoft is a huge corporate that strives on the business of acquiring other companies that can assist with their future endeavors. Some of their biggest strategies deal with focusing on the future. Due diligence is a key factor when it comes to finding the best target company and the best route for the acquisition transaction. Another strategy they use is finding target companies that are developing new technology that Microsoft wants to focus on in the future. Lastly, using a way to analysis an acquisition is imperative to making sure the transaction has the best outcome.

One of the best ways to do an analysis for an acquisition is doing a financial analysis using various techniques. The Weighted Average Cost of Capital (WACC) is a great technique for future investments. The Corporate Finance Institute (CFI) states that “A company will commonly use its WACC as a hurdle rate for evaluating mergers and acquisitions (M&A), as well as for financial modeling of internal investments.” This practice is great for mitigating financial risk by seeing if the purchase price is under or overvalued by calculating the net present value using the equation below.

WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))