How do you financially evaluate a merger or acquisition?
Mergers and acquisitions are a part of the increasingly expanding corporate world. However, many times, a merger or acquisition is given a go ahead, even though there is a possibility of it being unprofitable. To financially evaluate a merger or acquisition, the acquirer company should first determine whether the asking price is reasonable. Once this phase is over, you should check for the following key considerations before taking the final decision:
Debt and Liabilities:
The acquirer company should examine the target company's debt load. A good candidate for merger or acquisition is a company that has a sensible amount of debt with a high-interest rate which a more successful company can refinance to help lower the interest rate. However, if there are huge liabilities, it should be a point of concern to the companies willing to invest in the merger.
The acquirer company should make sure the target company has clean and organized financial statements. This will help the acquirer company to proceed with the merge with confidence; it will also help to avoid any legal issues once the merge is complete.
Value of the Company:
The acquirer company should also review the Present Value (PV) and future cash flows of the target company. In order to add value by merging or acquiring a company, the Net Present Value (NPV) of the investment should be positive.
Having a good understating of the frequency and the level of cash flow changes is very critical to the evaluation procedure. The main reason behind this is because there might be uncertainty about what might happen after the merge. Hence, it is helpful to conduct cash flow analysis and uncertainty analysis
It is also important to review the target company’s financial plans in the past and future. This will help in analyzing how well the target company did in the past, and how successful it will be in the future. Reviewing the target company’s income statement, balance sheet and cash flow statement will help in receiving a general idea of what the revenue and expenses will look like, after the merge.
Are there more pointers to consider before a company decides to merge with another?