How to consider the valuation of enterprises in the course of mergers and acquisitions

I think that from the long-term and large sample statistics, the value of an enterprise depends on whether it can directly or indirectly generate future cash flow. As to whether the ability to generate cash flow depends on whether the enterprise has a specific resource, including human resources, enterprise management capacity, purchasing bargaining power and sales capacity of salespeople and so on a variety of factors. We're doing mergers and acquisitions. Stand Alone Value (Enterprise Independent Valuation) is the comprehensive embodiment of the current enterprise capability. In my experience, the valuations of mergers and acquisitions are more complicated than the creation of investments (Greenfield investment). This is mainly because there is another factor, that is synergy value (Enterprise Synergy). The common point is that if your business I do, so the value generated.

The motives of enterprise mergers and acquisitions are numerous and miscellaneous, the simplest one is to pick up a leak, Amoy a treasure. This means that the buyer's valuation is lower than its real value, clearance sale, jump price, do not buy is simply "250". Another is also very common, is to see you not pleasing to the eye, or see not to let go, not to buy. This is often related to the buyer's likes and dislikes, like women see the right satchel, how expensive to buy, there is no reason to speak. Another is that the acquirer uses a variety of operations to reduce the risk of the main business. It's easy to put eggs in one basket. But one of the motivations we're focusing on today is based on an assumption. The assumption is that if two companies are merged, the value they generate should be higher than the value of an independent enterprise. That is, 1+1 is more than 2 after the acquisition.

If your purchase is motivated by the first 3, there is no synergy in this type of enterprise, and it is better to estimate the value of the individual enterprise. But if the acquisition has synergy, the valuation will change.

We first need to figure out where the synergy is coming from. In this paper, the synergy value is divided into two main categories: Operational synergy value and financial synergy value.

The operational synergy value can affect operating profit, and growth and increase the value of the merged enterprise through these. We also divided the operational synergy value into four small categories:

1. Scale effect: cost effective. Typically, two companies in the same industry carry out horizontal acquisitions. For example, Youku buys the good soil after potatoes.

2. The promotion of pricing rights: the promotion of pricing power mainly comes from the elimination of opponents, market share and position of relative improvement. This is usually two companies in the same industry in the horizontal acquisition, especially in the market competition is relatively small, mergers and acquisitions easily formed oligarchs, the price of their own decisions. For example, the Chinese media mergers and acquisitions dmg.

3. Complement of different functions: this is called functional synergy, others are what I lack. It can fill my blank. Such acquisitions are not limited to the same industry. Because many functions can migrate in different industries. Facebook, for example, buys WhatsApp.

4. The growth of the new market: companies to open up new Territories, acquire a strong local enterprise, use their local strength to increase the sale of their products. Danone, for example, has a stake in Wahaha and a joint venture with Mengniu later.

Financial synergy comes mainly from higher cash flows or lower capital costs and debt costs. Financial synergies include:

1. A company with a lot of money and no projects, and a company with a high return but no money, can create a higher value. This synergy generally comes from fish, or a listed company annexing a private enterprise. For example, Ali acquisition of the map of the German.

2. Higher debt-bearing capacity. With two companies merging, their income and cash flow may be more stable or predictable, so that the merged companies can borrow more money from banks. The increased leverage of the merged companies brings with it the tax benefits. This tax benefit is reflected in lower capital costs.

Generally speaking, the acquisition of the value of synergy is often the enterprise control of a particular resource, which is not limited to the form of resources. Such resources are valued by the acquirer, and if the merger succeeds, it will have greater value. For example:

1. Horizontal acquisitions, which tend to have a scale effect, cost will be reduced, or market position increased, so sales rose, profits increased.

2. Vertical acquisition, which is likely to produce a perfect industrial chain layout synergy.

3. There is also a functional acquisition that can fill my blanks.

So many mergers and acquisitions are likely to produce synergies. What is more important is how we value these synergies and how much we are willing to pay for these synergies. After all, companies are willing to pay large sums to pay for this synergy, and it is important to know how the value of these synergies is assessed. We do not elaborate on the valuation of synergy in this chapter.

The maximum valuation limit that the purchaser can pay is the independent value of the Enterprise + Synergy value. Since the merger of two companies, how to share the benefits of synergy? It depends on whether the buyer's contribution is unique or if it is easily substituted. If the buyer's contribution is easy to replace, then the benefits of synergy should be more points to the buyer. If the buyer's contribution is unique, then two will have to negotiate well. Similarly, if the acquirer has many pursuits, it can be grabs. This and the old society to marry a daughter-in-law almost, many times is because of the family to give more dowry, the girl married who.

In other words, since the valuation distance is often a period of time for an equity transfer agreement, and if there has been a major adverse change (MAC), the acquirer can assume that the acquirer has become less attractive. At this point, buyers tend to revalue or abandon acquisitions. Even if an equity transfer agreement has been signed, it is not uncommon for the acquirer to ask for a reassessment or abandonment of the takeover. The girl who is to marry if the gift half, or simply be Tuihun, this taste only the parties themselves understand.

Said the idea of industrial capital, we will focus on the industry in the company. One of the largest computer manufacturers in China, "Dare to think of the group" in 2004 to XX billion dollar plus equity to successfully acquire the United States "MBI" Company's global PC and notebook computer business, after the acquisition was completed, "Dare to" become one of the world's largest PC manufacturers, "MBI" to become "dare to" the second largest shareholder. Why did he do it instead of someone else? The industry has a huge range of computer manufacturers, in addition to Dell and Hewlett-Packard two Super Daniel, but also including Sony, Asus, Kingston, and the Great Wall and other companies, they also have computer hardware business respectively.

I think a very important reason is "dare to" business development model is good, the industrial chain framework layout is large enough, at the same time, with the help of China's unique advantages of lower human cost, established a relatively deep "moat." If other companies are forced to do this thing, on the contrary, will be dragged down by the "takeover Company", even if the full amount of money to buy him down, you also "do not live" him, but also because they want to raise him for his debt, and he "starved to death." and "Dare to think" different, he not only can "feed", but also let it "for their own money", because he can be the business of industry synergy, common development, make up for the lack of mutual, achieve a total win.

Although the idea of industrial capital and VC/PE is fundamentally different, it is only because the two organizations have differing views on "business" and "valuation", and in actual investment activities, they are not non-a or B. Shopping malls such as battlefield, as long as there is development, money to earn, then they will not let go. Investment is absolutely "all roads lead to Rome", there is no pat, and often the success or failure of the hero, so "go your own way, let others say go."

In the next chapter we'll discuss a deeper question: will acquisitions create value? Through virtual examples and some simplified mathematical models, we will further elaborate on some of the basic concepts covered in this chapter.