Theoretical connections between various valuation models in cross-border mergers and acquisitions

Abstrakt

Cross-border mergers and acquisitions are complex. Many acquisitions do not always meet its goal for a number of reasons. This is due to multinational regulations, antitrust concerns, wealth transfer across different claimants, and importantly a choice of the appropriate valuation techniques. All of these can bring a greater risk of failure. An accurate and appropriate valuation of a target company is crucial. This process is necessary for both the acquiring and target company. It helps the acquiring company decide on the value of a potential acquisition, and allows for successful and fair negotiation. In addition, it aims for a comparison of various target companies and helps predict the success of a potential merger. The purpose of this thesis is not only to review the process of international mergers and acquisitions by focusing on the techniques of business valuation but also to present theoretical topics associated with various valuation methods in both pre- and post-international takeover. The thesis approaches these issues by using a hypothetical takeover situation of an US-based pharmaceutical firm, Eli Lilly & Company by a Danish pharmaceutical company, H. Lundbeck. Four primary valuation models; Discounted Cash Flow, Publicly Traded Comparable Company Peer Group and Comparable Change of Control Transaction, and Adjusted Present Value valuation methods are chosen. These models are selected because its simplicity. Moreover, they are widely used among valuation professionals, and are comparable among themselves. Variety of techniques of various complexities and utilities of each models are discussed. Necessary data are obtained from the public annual reports, published market researches, financial databases, strategic and industry analysis. The thesis finds that successful acquisition is not only about getting the right assumptions, choosing the best valuation techniques and negotiation of a purchase acceptable for both the target and acquiring company. Valuation techniques depend on a company to company, and market to market. Other concerns are also involved in the successful acquisition process. These issues are related to cross-border mergers and acquisitions such as how the valuation affects the decision to tender an offer, and the negotiation process. The impact of different forms of acquisition on the negotiation process, the kinds of appropriate currency and discount rate to be used when evaluating a cross-border company and the implications of the transfer of wealth that occur as part of a merger.